What You Should Know About Investing In Commodities
Kanebridge News
    HOUSE MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $1,635,570 (+0.09%)       Melbourne $990,779 (-0.14%)       Brisbane $1,002,534 (+0.89%)       Adelaide $899,189 (+1.63%)       Perth $853,385 (-0.01%)       Hobart $727,599 (-0.08%)       Darwin $665,330 (-2.24%)       Canberra $1,030,329 (+2.00%)       National $1,054,780 (+0.44%)                UNIT MEDIAN ASKING PRICES AND WEEKLY CHANGE     Sydney $758,114 (+0.56%)       Melbourne $494,774 (+0.21%)       Brisbane $562,776 (+0.42%)       Adelaide $448,109 (+2.19%)       Perth $451,267 (-0.77%)       Hobart $504,603 (-1.31%)       Darwin $357,621 (+2.79%)       Canberra $496,414 (-0.41%)       National $532,600 (+0.26%)                HOUSES FOR SALE AND WEEKLY CHANGE     Sydney 10,429 (+70)       Melbourne 14,915 (+41)       Brisbane 7,933 (-18)       Adelaide 2,089 (-116)       Perth 5,787 (-101)       Hobart 1,241 (+4)       Darwin 244 (-2)       Canberra 988 (+18)       National 43,626 (-104)                UNITS FOR SALE AND WEEKLY CHANGE     Sydney 8,586 (+58)       Melbourne 8,221 (+87)       Brisbane 1,635 (+21)       Adelaide 372 (-9)       Perth 1,517 (-36)       Hobart 198 (-10)       Darwin 404 (-2)       Canberra 1,028 (+31)       National 21,961 (+140)                HOUSE MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $820 (+$3)       Melbourne $600 (-$5)       Brisbane $650 ($0)       Adelaide $600 ($0)       Perth $680 ($0)       Hobart $550 ($0)       Darwin $750 ($0)       Canberra $680 (+$10)       National $676 (+$1)                UNIT MEDIAN ASKING RENTS AND WEEKLY CHANGE     Sydney $760 (-$10)       Melbourne $595 (-$5)       Brisbane $640 (-$3)       Adelaide $500 (+$5)       Perth $620 ($0)       Hobart $450 ($0)       Darwin $540 (-$10)       Canberra $550 (-$10)       National $596 (-$5)                HOUSES FOR RENT AND WEEKLY CHANGE     Sydney 5,832 (+125)       Melbourne 6,113 (+155)       Brisbane 4,426 (+39)       Adelaide 1,506 (+63)       Perth 2,727 (+138)       Hobart 431 (+13)       Darwin 95 (-3)       Canberra 602 (+6)       National 21,732 (+536)                UNITS FOR RENT AND WEEKLY CHANGE     Sydney 10,046 (+377)       Melbourne 6,071 (+301)       Brisbane 2,272 (+28)       Adelaide 373 (+1)       Perth 740 (-4)       Hobart 143 (+14)       Darwin 136 (+6)       Canberra 746 (+30)       National 20,527 (+753)                HOUSE ANNUAL GROSS YIELDS AND TREND       Sydney 2.61% (↑)        Melbourne 3.15% (↓)       Brisbane 3.37% (↓)       Adelaide 3.47% (↓)     Perth 4.14% (↑)      Hobart 3.93% (↑)      Darwin 5.86% (↑)        Canberra 3.43% (↓)       National 3.33% (↓)            UNIT ANNUAL GROSS YIELDS AND TREND         Sydney 5.21% (↓)       Melbourne 6.25% (↓)       Brisbane 5.91% (↓)       Adelaide 5.80% (↓)     Perth 7.14% (↑)      Hobart 4.64% (↑)        Darwin 7.85% (↓)       Canberra 5.76% (↓)       National 5.81% (↓)            HOUSE RENTAL VACANCY RATES AND TREND       Sydney 0.8% (↑)      Melbourne 0.7% (↑)      Brisbane 0.7% (↑)      Adelaide 0.4% (↑)      Perth 0.4% (↑)      Hobart 0.9% (↑)      Darwin 0.8% (↑)      Canberra 1.0% (↑)      National 0.7% (↑)             UNIT RENTAL VACANCY RATES AND TREND       Sydney 0.9% (↑)      Melbourne 1.1% (↑)      Brisbane 1.0% (↑)      Adelaide 0.5% (↑)      Perth 0.5% (↑)      Hobart 1.4% (↑)      Darwin 1.7% (↑)      Canberra 1.4% (↑)      National 1.1% (↑)             AVERAGE DAYS TO SELL HOUSES AND TREND         Sydney 28.9 (↓)     Melbourne 30.3 (↑)        Brisbane 30.8 (↓)       Adelaide 25.4 (↓)     Perth 36.1 (↑)      Hobart 37.8 (↑)      Darwin 35.1 (↑)        Canberra 28.5 (↓)     National 31.6 (↑)             AVERAGE DAYS TO SELL UNITS AND TREND         Sydney 29.6 (↓)       Melbourne 30.2 (↓)     Brisbane 29.6 (↑)        Adelaide 25.4 (↓)     Perth 38.3 (↑)      Hobart 30.1 (↑)        Darwin 46.7 (↓)       Canberra 38.0 (↓)     National 33.5 (↑)            
Share Button

What You Should Know About Investing In Commodities

Recent strong performance has attracted a lot of neophytes. They may have much to learn.

By Simon Constable
Thu, Mar 10, 2022 3:51pmGrey Clock 5 min

After years in the investing wilderness, commodities are hot again. And it looks as if the rally may continue for at least the foreseeable future, some analysts say.

The speed of the rally has been striking. The Refinitiv/CoreCommodity CRB Index, which tracks a basket of commodities selected to represent prices of futures contracts across the whole sector, doubled from April 2020 through mid-February.

That performance follows a yearslong period when the index trended lower. And the surge is now attracting investors of all types—from veterans to neophytes.

The latter would do well to understand some of the basics in how commodity investing works. Commodities typically get grouped into three broad buckets: energy, foodstuffs and materials. Each has endemic risks, including weather, local and geopolitics.

Each also offers the possibility of direct investment, in the commodities themselves, or indirect investment, through vehicles such as mutual funds and exchange-traded funds. For the relatively inexperienced, direct investing in commodities can be particularly challenging, in part because of additional costs and risks generally not found in other types of investing. We’ll get to those details in a moment.

What follows is a look at some of the basics of commodity investing.

Complicated economics

The price of each commodity gets determined by the supply and demand dynamics for that item. For instance, last year bad weather in Brazil hurt the coffee crop and pushed up the cost of beans. Likewise, an attack on an oil-refining plant in the Middle East will tend to disrupt supplies and spark an energy-market rally.

Commodity markets are global. What happens in one country can have an impact on commodity prices world-wide. Therefore, all commodity investors should keep an eye on what’s happening not just in the U.S. but around the world.

While even just the risk of war can send prices higher for commodities, particularly those that originate in the countries directly involved, actual invasion tends to send those prices even higher. That is exactly what happened with the conflict between Ukraine and Russia as both countries are leading exporters of foodstuffs. Although the invasion began on Feb. 24, prices were rising long before. A bushel of wheat is fetching $13.48, up 77% from $7.61 at the beginning of February on fears that global supplies would be disrupted. Likewise, corn prices have rallied 21% over the same period. Such surges added to those already happening in the commodity markets. Even before the war, unfavourable weather- and pandemic-related disruptions across the world were reducing supplies and sending prices higher when production couldn’t keep up with demand.

Sometimes a price change in one commodity causes the cost of another one to move as well. One typical example is in livestock farming. Farmers sometimes switch from feeding hogs or cattle with costly grain to less-pricey alternatives. They might decide to buy corn from arable farmers instead of wheat or vice versa depending on the relative prices. In turn, those prices change to reflect the new demand for each product. This phenomenon shouldn’t be too surprising. Imagine if the cost of aged blue Stilton increases at the supermarket; at least some people will likely switch to a less-expensive cheese.

Price swings

Unlike commodity traders and other professionals whose direct positions in oil or grain might change from second to second, average investors in commodities will have longer time frames in mind for their commodity-related holdings. But a simple buy-and-hold strategy here won’t help you accumulate wealth as it would in the stock market.

Commodity prices can frequently trend lower for decades. New technologies, such as better farming techniques or methods of mineral extraction, have allowed supplies to increase over time, depressing prices.

For instance, oil hit a record high of around $147 a barrel in 2008 versus the current price of $115.68. Likewise, Arabica coffee prices peaked at $3.35 a pound in 1977 versus $2.24 now. When these prices get adjusted for inflation, the declines look starker.

Thus, even for individual investors in commodity-related investments, timing in these markets can be critical. Whether you think of your investment as short term or long term, investors need to pay attention to buy at the right moment and sell at an auspicious one. Lean-hog prices tripled from 37 cents a pound in April 2020 to $1.20 in June 2021 before collapsing to 72 cents in October. Anyone not ready for such swings will be in for a shock and an emotional roller coaster.

Adding commodities to a larger balanced portfolio can also help reduce risks as commodity prices tend to have low correlation to other assets such as stocks and bonds. That means when the S&P 500 falls, commodity prices may go up, or down, or not move at all.

One more advantage to investing directly in commodities rather than commodity companies is that a layer of risk is removed. When investing in stock there is always the possibility that management may make mistakes even when the underlying sector economics are favorable.

The futures market

Commodity investors typically don’t operate in the cash market, meaning they don’t purchase physical materials such as metals, oil, or foodstuffs. Instead, traders mostly buy or sell futures contracts in the hope of benefiting from the increase or decrease in prices. These contracts are legally binding agreements to buy or sell a specific volume of a commodity on a specific date in the future.

Ultimately, the prices in the futures market and those in the cash market will tend to converge. That’s why commodity producers and consumers use futures to hedge the risks of market price movements.

 

 

No dividends

Most stocks pay dividends to investors, meaning you can make money even if the share prices don’t move. Pretty much the opposite is true for commodity investors. It costs money to own commodities. For example, a buyer of 100 ounces of gold bullion will need to cover the costs of storage and insurance for the metal. While such expenses can be low for precious metals, they can stack up faster for crude oil and grains such as wheat and corn as more extensive facilities are needed to hold the stuff.

Mutual funds & ETFs

For fund investors, there are many choices. More than 150 mutual funds and ETFs cover the sector. Unfortunately, that means much due diligence is required. In short, it’s essential to understand what the fund owns and what its strategy is.

Just as with stocks, there are both passive funds (those that track a benchmark index) and active ones (those that follow a discretionary investing strategy).

In the passive category, some track the price of single commodities, such as SPDR Gold Shares ETF (GLD) and Invesco DB Gold Fund (DGL), which track slightly different benchmarks. Likewise, there is an ETF for wheat, Teucrium Wheat (WEAT). There are also passive funds that are designed to track groups of commodities, such as Invesco DB Base Metals (DBB), or the whole sector, such as iShares S&P GSCI Commodity-Indexed Trust (GSG).

Actively managed funds, such as the active ETF First Trust Global Tactical Commodity Strategy Fund (FTGC), make decisions on what commodities to buy or sell.

A warning on leveraged funds

There are a couple of wrinkles to watch out for with all types of funds. First, average investors should avoid any fund that uses leverage to enhance performance. Such funds often promise to deliver two or three times the performance of a given commodity. While that means such funds can deliver multiplied profits, they also magnify losses.

Other funds claim that they’ll mimic an inverse performance so that if a commodity’s price falls, the fund will increase in value by a similar amount. This isn’t the same as a hedge against losses unless the trade is made specifically to diversify risk within a larger portfolio. Another problem with these funds is that there can be significant tracking errors. These funds are best left to sophisticated investors.

It’s also worth being cautious about exchange-traded notes, or ETNs. This type of investment can expose investors to the risk that the fund company goes bust. ETFs and mutual funds protect investors against such events.

As with all investing, investors should find funds with low expense ratios. Annual fund expenses mainly range from 0.5% to 1%. Leveraged funds tend to have expenses of 1% and more. These compare with costs of 0.09% for SPDR S&P 500 ETF, which tracks the S&P 500.

Riches and rags

Investing guru Jim Rogers famously made a boatload of money during the 1970s investing in the commodity markets while material prices and food costs jumped. And there will likely be other people who do similarly again.

However, even the most sophisticated investors sometimes come unstuck, such as the Hunt brothers. In 1980 they accumulated major positions in the silver futures market using borrowed money. But a change in exchange rules led to a price drop, and quickly the brothers couldn’t cover their obligations. In other words, be careful in the commodity markets.



MOST POPULAR
11 ACRES ROAD, KELLYVILLE, NSW

This stylish family home combines a classic palette and finishes with a flexible floorplan

35 North Street Windsor

Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

Related Stories
Money
A Killer Golf Swing Is a Hot Job Skill Now
By CALLUM BORCHERS 14/06/2024
Money
Apple Sued by Employees Alleging Unequal Pay for Women
By ERIN MULVANEY 14/06/2024
Money
The unexpected reasons Australians are retiring earlier than planned
By Bronwyn Allen 14/06/2024
A Killer Golf Swing Is a Hot Job Skill Now

Companies are eager to hire strong players who use hybrid work schedules to schmooze clients on the course

By CALLUM BORCHERS
Fri, Jun 14, 2024 5 min

Standout golfers who aren’t quite PGA Tour material now have somewhere else to play professionally: Corporate America.

People who can smash 300-yard drives and sink birdie putts are sought-after hires in finance, consulting, sales and other industries, recruiters say. In the hybrid work era, the business golf outing is back in a big way.

Executive recruiter Shawn Cole says he gets so many requests to find ace golfers that he records candidates’ handicaps, an index based on average number of strokes over par, in the information packets he submits to clients. Golf alone can’t get you a plum job, he says—but not playing could cost you one.

“I know a guy that literally flies around the world in a private jet loaded with French wine, and he golfs and lands hundred-million-dollar deals,” Cole says.

Tee times and networking sessions have long gone hand-in-golf-glove. Despite criticism that doing business on the course undermines diversity, equity and inclusion efforts—and the fact that golf clubs haven’t always been open to women and minorities —people who mix golf and work say the outings are one of the last reprieves from 30-minute calendar blocks

Stars like Tiger Woods and Michelle Wie West helped expand participation in the sport. Still, just 22% of golfers are nonwhite and 26% are women, according to the National Golf Foundation.

To lure more people, clubs have relaxed rules against mobile-phone use on the course, embracing white-collar professionals who want to entertain clients on the links without disconnecting from the office. It’s no longer taboo to check email from your cart or take a quick call at the halfway turn.

With so much other business conducted virtually, shaking hands on the green and schmoozing over clubhouse beers is now seen as making an extra effort, not slacking off.

Americans played a record 531 million rounds last year. Weekday play has nearly doubled since 2019, with much of the action during business hours , according to research by Stanford University economist Nicholas Bloom .

“It would’ve been scandalous in 2019 to be having multiple meetings a week on the golf course,” Bloom says. “In 2024, if you’re producing results, no one’s going to see anything wrong with it.”

A financial adviser at a major Wall Street bank who competes on the amateur circuit told me he completes 90% of his tasks by 10 a.m. because he manages long-term investment plans that change infrequently. The rest of his workday often involves golfing with clients and prospects. He’s a member of a private club with a multiyear waiting list, and people jump at the chance to join him on a course they normally can’t access.

There is an art to bringing in business this way. He never initiates shoptalk, telling his playing partners the round is about having fun and getting to know each other. They can’t resist asking about investment strategies by the back nine, he says.

Work hard, play hard

Matt Parziale golfed professionally on minor-league tours for several years, but when his dream of making the big time ended, he had to get a regular job. He became a firefighter, like his dad.

A few years later he won one of the biggest amateur tournaments in the country, earning spots in the 2018 Masters and U.S. Open, where he tied for first among non-pros.

The brush with celebrity brought introductions to business types that Parziale, 35 years old, says he wouldn’t have met otherwise. One connection led to a job with a large insurance broker. In 2022 he jumped to Deland, Gibson Insurance Associates in Wellesley, Mass., which recognised his golf game as a tool to help win large accounts.

He rescheduled our interview because he was hosting clients at a private club on Cape Cod, and squeezed me in the next morning, before teeing off with a business group in Newport, R.I.

A short time ago, Parziale couldn’t imagine making a living this way. Now he’s the norm in elite amateur golf circles.

“I look around at the guys at the events I play, and they all have these jobs ,” he says.

His boss, Chief Executive Chip Gibson, says Parziale is good at bringing in business because he puts as much effort into building relationships as honing his game. A golf outing is merely an opportunity to build trust that can eventually lead to a deal, and it’s a misconception that people who golf during work hours don’t work hard, he says.

Barry Allison’s single-digit handicap is an asset in his role as a management consultant at Accenture , where he specialises in travel and hospitality. He splits time between Washington, D.C., and The Villages, Fla., a golf mecca that boasts more than 50 courses.

It can be hard to get to know people in distributed work environments, he says. Go golfing and you’ll learn a lot about someone’s temperament—especially after a bad shot.

“If you see a guy snap a club over his knee, you don’t know what he’s going to snap next,” Allison says.

Special access

On a recent afternoon I was a lunch guest at Brae Burn Country Club, a private enclave outside Boston that was the site of U.S. Golf Association championships won by legends like Walter Hagen and Bobby Jones. I parked in the second lot because the first one was full—on a Wednesday.

My host was Cullen Onstott, managing director of the Onstott Group executive search firm and a former collegiate golfer at Fairfield University. He explained one reason companies prize excellent golfers is they can put well-practiced swings on autopilot and devote most of their attention to chitchat.

It’s hard to talk with potential customers about their needs and interests when you’re hunting for errant shots in the woods. It’s also challenging if you show off.

The first hole at Brae Burn is a 318-yard par 4 that slopes down, enabling big hitters like Onstott to reach the putting green in a single stroke. But to stay close to his playing partners and keep the conversation flowing, he sometimes hits a shorter shot.

Having an “in” at an exclusive club can make you a catch. Bo Burch, an executive recruiter in North Carolina, says clubs in his region tend to attract members according to their business sectors. One might be chock-full of real-estate investors while another has potential buyers of industrial manufacturing equipment.

Burch looks for candidates who are members of clubs that align with his clients’ industries, though he stresses that business acumen comes first when filling positions.

Tami McQueen, a former Division I tennis player and current chief marketing officer at Atlanta investment firm BIP Capital, signed up for private golf lessons this year. She had noticed colleagues were wearing polos with course logos and bringing their clubs to work. She wanted in.

McQueen joined business associates on the golf course for the first time in March at the PGA National Resort in Palm Beach Gardens, Fla. She has lowered her handicap to a respectable 26 and says her new skill lends a professional edge.

“To be able to say, ‘I can play with you and we can have those business meetings on the course’ definitely opens a lot more doors,” she says.

MOST POPULAR
11 ACRES ROAD, KELLYVILLE, NSW

This stylish family home combines a classic palette and finishes with a flexible floorplan

35 North Street Windsor

Just 55 minutes from Sydney, make this your creative getaway located in the majestic Hawkesbury region.

Related Stories
Lifestyle
Stressing Over Your Next Home Renovation Project? Let AI Handle It.
By NANCY KEATES 13/06/2024
Money
The unexpected reasons Australians are retiring earlier than planned
By Bronwyn Allen 14/06/2024
Lifestyle
EV Trade War Could Spread to Luxury Cars
By STEPHEN WILMOT 12/06/2024
0
    Your Cart
    Your cart is emptyReturn to Shop