Trading those crazy commodities (Silver, Gold, Oil)

By: ispeculatornew
Date posted: 05.11.2011 (5:00 am) | Write a Comment  (2 Comments)

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The past few weeks has seen incredible action in commodity prices. Oil and Gold have suffered greatly but nothing was even close to the collapse in Silver prices. It’s a challenge to draw any conclusions from such dramatic movements. For months, these metals had been gaining steam because of both retail and institutional buying. Then last week, news came out that some of them had started closing their long positions on silver. It’s not clear if they knew something or if they’re selling created even more selling but that pretty much marked the start of a spectacular decline. Just take a look at the charts and you will get an idea. Part of the cause was also the exchanges themselves. Seeing what they considered “excessive” speculation, the CME raised its margin requirements on silver contracts making life more difficult and more expensive for silver traders.

Investing In Commodities

Seeing commodities become so volatile certainly raises some questions. Should you have commodities or commodity exposure in your passive income retirement portfolio? I would personally say that yes you do. Commodities are already an important portion of the world economy and with Chinese and other Emerging markets demand, that is bound to continue its increase. Thus, in the long term, it certainly seems like a no-brainer to own them. Commodities are also uncorrelated to most of the markets and so they have a valuable contribution to your portfolio in terms of risk/reward. That being said, I think events like what happened last wek give a good example of why you do not want to have commodities as the main part of your portfolio. I do believe that over the long term commodities will increase significantly. However, fundamentals are kind of lost in a sea of traders when it comes to commodities making life much more stressful and difficult for those with a long term view.

Should Speculators Trade Commodities?

It’s a fair question isn’t it? Since commodities started trading because farmers wanted to hedge their crops, times have hcnaged quite a bit. Now, actual buyer and sellers are involved in high stakes poker games where it becomes very difficult to predict where it’s not clear what is taking prices up and down. There are underlying more serious issues. Honestly, how could you possibly try to determine who is “hedging” and who isn’t it? Millions of companies have some kind of exposure to silver making it virtually impossible to determine what is hedging from what isn’t. For gold, that would be unthinkable as many use gold as an inflation hedge. There’s just no way it could work.

When It Extends To Food

Paying more for energy or metals is unfortunate for most but speculators trading commodities truly starts to get attention when it affects food prices. Billions of people around the world depend to some extent on food prices and having these prices fluctuating by 10-20% or even more can make life very unpredictable for the billions that do not have enugh to tolerate such movements.

How To Get Some Commodity Exposure?

There are many different ways but by far the cheapest and most efficient solution involves ETF’s. We have discussed the top ones many times but I think you want to focus on two types of ETF’s:

Commodity ETF’s that hold physical commodities (such as GLD)
Futures based (focus on ETF’s that do not roll monthly but rather infrequently.. They will suffer less erosion)

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  1. Comment by William — May 12, 2011 @ 4:14 pm

    Silver has had a such a massive run up that its huge drop doesn’t come as a surprise. After things calm down including the volatility it should be interesting if the bull market continues in commodities. If the stock market holds up and inflation comes on stronger it will be real interesting.

  2. Comment by IS — May 12, 2011 @ 7:49 pm

    @William – True but how low will it go? Just seems like such extreme movements!

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