Thursday, June 22, 2006

Replies on Commodities

I received lots of feedback on the commodities entry below. A good friend of mine who trades commodities as his main investing activity accused me of being negative and commented that I didn't give much practical commodities investing advice. Thinking of my readers I immediately asked him to share some advice he would give for a new commodities trader and I was able to get the following out of him:

I think it's safe to say that most speculators invest for the short term -less than a year (probably for reasons you state - little price appreciation in many commodities over the long term, multiple years). The producers and consumers of the's hard to say when they sell and purchase, as these are of course driven by their business models.

Volatility is pretty extreme, due to leverage...but if you're able to get the right data, come up with a decent strategy, and stick with it, you'll be OK. Regarding strategies, the seasonal features of many commodities may not be present in the stock market...most likely not to the extent present in commodities. When one starts to take advantage of seasonality and spread based strategies, the volatility tends to smooth out, and some of the risk is reduced. Spreads and seasonals take time (months), so if you want thrills and chills, they're probably not much fun.

Hmmm... I would have written more in depth if I knew it but this is one of those categories where I admit I don't know much (yet).

Another interesting comment from one of our frequent readers (and previous Wonk of The Day winner) C6H6 deserves to be pulled to the front page here:

If you want to invest in commodities, there is now an easy way without getting into the challenges and risks associated with futures markets. There is an ETF traded on the Amex exchange under the symbol DBC that tracks the Deutsche Bank Liquid Commodity Index Excess Return. You can check out the facts here. While it is a fairly new fund, launching in February this year, it tracks the broad Reuters/Jeffries CRB index extremely well (so far).

That may read like an add for the DBC fund but C6H6 has been a contributor here for a while and he's no shill. My thanks to those who critique and give feedback, it's the best way for all of us to get to the bottom of things.

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