Here’s How to Navigate the Commodity Investing Waters

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In the past couple of years, commodities have not been a good place to put your money. However, longer term, they have been outperforming stocks. Since the turn of the century, there are many commodities that have increased several multiples in price:

  • Oil has risen from $20 per barrel to more than $100 per barrel.
  • Corn has risen from $2 per bushel to nearly $5 per bushel.
  • Gold has risen from $250 per ounce to $1,250 per ounce.
  • Copper has risen from less than $1 per pound to more than $3 per pound.

This strong performance is due to a couple of factors. The first is rising demand, particularly from emerging market countries with economies that are growing rapidly. This rising demand has put upward pressure on prices. The second is a lack of supply. When commodities are in a bear market, there is less investment in mining, and this means that there is lower supply. Throughout the 1980s and 1990s, there was a bear market in commodities, and therefore there was less production.

While commodity prices have corrected and consolidated over the past couple of years, I suspect that the uptrend is about ready to continue. Demand is still strong in emerging economies, and yet commodities are still not very profitable to produce. These factors will drive prices higher. But how should you invest in commodities?