Commodities Articles

Article / Updated 10-09-2023

One of the unique characteristics of silver among other commodities is that you can invest in it by actually buying the stuff, as you can buy gold coins and bars for investment purposes. Most dealers that sell gold generally offer silver coins and bars as well. 100-ounce silver bar: If you’re interested in something substantial, you can buy a 100-ounce silver bar. Before buying it, check the bar to make sure that it’s pure silver (you want 99 percent purity or above). Silver maple coins: These coins, which are a product of the Royal Canadian Mint, are the standard for silver coins around the world. Each coin represents 1 ounce of silver and has a purity of 99.99 percent, making it the most pure silver coin on the market. The term sterling silver refers to a specific silver alloy that contains 92.5 percent silver and 7.5 percent copper (other base metals are occasionally used as well). Pure silver is sometimes alloyed with another metal, such as copper, to make it stronger and more durable. Just remember that if you’re considering silver jewelry as an investment, sterling silver won’t give you as much value in the long term as pure silver.

Article / Updated 10-05-2023

The idea that diversification is a good strategy in portfolio allocation is the cornerstone of Modern Portfolio Theory (MPT). MPT is the brainchild of Nobel Prize–winning economist Harry Markowitz. In a paper he wrote in 1952 for his doctoral thesis, Markowitz argued that investors must look at a portfolio's overall risk/reward ratio. Although this sounds like common sense today, it was a groundbreaking idea at the time. Before Markowitz's paper, most investors constructed their portfolios based on a risk/reward ratio analysis of individual securities. Investors chose a security based on its individual risk profile and ignored how that risk profile fit within a broader portfolio. Markowitz argued (successfully) that investors could construct more profitable portfolios if they looked at the overall risk/reward ratio of their portfolios. Therefore, when considering an individual security, you need to not only assess its individual risk profile, but also take into account how that risk profile fits within your general investment strategy. Markowitz's idea that holding a group of different securities reduces a portfolio's overall volatility is one of the most important ideas in portfolio allocation.

Article / Updated 08-07-2023

Why is gold such an important commodity compared to other metals? The traits of ductility, malleability, quasi-indestructibility, and rarity can help you understand where gold derives its value: Ductility: Gold is a very ductile metal. In metallurgy, ductility measures how much a metal can be drawn out into a wire. For example, 1 ounce of gold can be converted into more than 50 miles of gold wire! This gold wire can then be applied in electronics and used as an electric conductor. Malleability: Pure gold (24 karat) is a very malleable metal and is prized by craftsmen around the world who shape it into jewelry and other objects of beauty. One ounce of gold can be transformed into more than 96 square feet of gold sheet! Quasi-indestructibility: Gold has high resistance levels and doesn’t easily corrode. Corrosive agents such as oxygen and heat have almost no effect on gold, which can retain its luster over long periods of time (think thousands of years). The only chemical that can affect gold is cyanide, which dissolves gold. Rarity: Gold is one of the rarest natural resources on earth. Most people don’t realize this, but only about 150,000 tons of gold have ever been produced since humans first began mining gold more than 6,000 years ago. To give you an idea of how little that is, all the gold in the world wouldn’t even fill up four Olympic-size swimming pools! And because most gold is recycled and never destroyed, a majority of gold is still in use today. About 15 percent of gold is recycled every year.

Cheat Sheet / Updated 08-02-2023

If you're considering investing in commodities or commodities-backed instruments, you'll want to find out as much as you can about what you're investing in. Companies have to file quarterly and annual financial reports, and they provide a wealth of information that is very valuable to the investor. The premiere location for the trade of agricultural commodities is the New York Board of Trade (NYBOT), and you'll want to become familiar with it. When you do invest, you'll want to practice the magic word — diversification — and manage the risk/reward ratio for not just your individual securities, but for your overall portfolio.

Article / Updated 07-10-2023

One of the biggest trends in the global investment game in the beginning of the 21st century is the increasing popularity of commodities in investor portfolios. Driven by high commodity prices, many investors are looking for ways to profit in this sector. Commodity exchanges are becoming popular vehicles through which investors access the commodity markets. Because of their unique position, commodity exchanges stand to gain tremendously from this interest from the investing public. Interested in cashing in on this trend without trading a single contract on a single commodity exchange? Sometimes, with all the commotion associated with the trading floors on commodity exchanges, it’s easy to forget that an exchange is a business like any other business. Exchanges have employees, board members, revenues, earnings, expenses, and so on. Exchanges aren’t charitable organizations; a commodity exchange is a for-profit enterprise. Just as a car manufacturer sells cars to customers, commodity exchanges sell commodity contracts to customers. That’s their bread and butter — their business is to sell financial instruments to the investing public. As with any company, exchanges charge a fee for this service. For most of their existence, exchanges have been privately held companies whose business side has remained under close wraps. However, because of the increasing popularity of commodities and the rise of the electronic trading platform, many commodity exchanges are now going public. That is, they’re becoming public companies with shareholders and outside investors. Most of the commodity exchanges are now traded on stock exchanges just like Microsoft, Ford, or Wal-Mart. In 2003, the Chicago Mercantile Exchange (the nation’s largest commodity exchange in terms of volume) went public. Its shares are now traded on the New York Stock Exchange under the ticker symbol CME. CME went public at a price of $43 a share. After reaching a high of $700 a share in 2007 and a low of $200 during the Global Financial Crisis, the stock price has stabilized in the $300 range since 2008. Encouraged by these results, a number of other commodity exchanges went public soon afterward, and more are following suit. You can cash in on this trend by becoming a shareholder in one of these exchanges. Before you purchase equity (stock) in one of the commodity exchanges, make sure that you perform a thorough analysis of the stock and the company fundamentals. A stock never goes up in a straight arrow — it always retreats before making new highs. Sometimes it doesn’t make new highs at all. You should follow a stock on paper — that is, follow its movements without actually owning the stock — for a period of at least two weeks. That way, you can get a feel for how the stock moves with the rest of the market. You can hopefully pinpoint the right entry and exit points. Exchange Name Ticker Listed In IPO Date IPO Price Chicago Mercantile Exchange CME NYSE December 2002 $43.60 Intercontinental Exchange ICE NYSE November 2005 $39.00 If you’re interested in profiting from the popularity of commodity exchanges, a unique way to do so is to purchase equity in these exchanges directly. The benefit is that you get to capitalize on the growing commodity trend without actually having to buy commodity exchange-traded products.

Article / Updated 07-05-2023

The New York Board of Trade (NYBOT) is one of the oldest exchanges in the United States and is the premier location for the trade of agricultural commodities. The NYBOT also offers futures contracts that track cotton, ethanol, and wood pulp (pulp is used to make paper), as well as products that track several financial futures, such as the euro (the currency), the New York Stock Exchange Composite Index, and the Reuters/Jefferies CRB Index. (The NYBOT is also where the movie Trading Places, with Eddie Murphy and Dan Aykroyd, was shot. In the final scene of the movie, Murphy and Aykroyd corner the orange juice market and, in the process, wipe out Randolph and Mortimer Duke.) As a sign of the times and the advent of electronic trading, in 2007, the ICE, an all-electronic trading platform, acquired the NYBOT. Although the ICE has integrated many of the commodities offered on the NYBOT with its electronic platform, many traders still refer to the original NYBOT commodities as ICE/NYBOT.

Article / Updated 07-05-2023

The Securities and Exchange Commission (SEC) requires publicly traded companies in the United States to file annual and quarterly reports. The quarterly report, known as Form 10Q, contains information about the company's financial operations during each of the first three fiscal quarters in a given year. (A company doesn't need to file a quarterly report at the end of the fiscal year, because that's when the annual report is released.) Form 10K, which is the annual report, contains a much more comprehensive overview of a company's financial operations. It's released at the end of the fourth quarter of the fiscal year and includes information on the company's structure, shareholders, business activities, assets, and liabilities. An additional disclosure form you may want to look at is Form 8K. A company is required to file Form 8K with the SEC if it undertakes structural changes, such as a merger or acquisition, bankruptcy, or election of new board members. Form 8K may contain important information regarding the company's future plans. So, where can you check out a company's annual report or Form 8K? Perhaps the best resource for this type of information is EDGAR. It includes comprehensive SEC filings. You may need a subscription to access it.

Article / Updated 07-05-2023

Commodities are cyclical in nature. Returns on commodity investments aren’t generated in a vacuum — they’re influenced by a number of economic forces. In other words, the performance of commodities, like that of other major asset classes, is tied to general economic conditions. Because economies move in cycles, constantly alternating between expansions and recessions, commodities react according to the current economic phase. The performance of commodities as an asset class is going to be different during economic expansions than during recessions. As a general rule, commodities tend to do well during periods of late expansions and early recessions. The reason is that, as the economy slows, key interest rates are decreased to stimulate economic activity — this tends to help the performance of commodities. Stocks and bonds, on the other hand, don’t perform as well during recessions. As an investor seeking returns across all phases of the business cycle, opening up to commodities enables you to generate returns during good and bad economic times. The study of cycles, whether for commodities, stocks, or other assets, isn’t an exact science. Don’t use cycles as the foundation of a trading or investment strategy. Instead, try to use the study of cycles to get a sense of what historical patterns have indicated — and where an asset class is heading. Although the historical pattern of commodities tends to show better performance during late expansions and early recessions, this in no way guarantees that commodities will keep following this pattern. Actually, during the latest commodity bull market, commodities have acted independently of the business cycle. This performance may be attributed to the fact that this commodity bull market is a different beast than in previous cycles.

Article / Updated 10-06-2022

Established in 1848, the Chicago Board of Trade (CBOT) used to be the oldest commodity exchange in the world. The CBOT was the go-to exchange for grains and other agricultural products, such as oats, ethanol, and rice. The exchange also offered several metals contracts targeted at individual investors, including the mini gold and mini silver contracts. In 2007, the Chicago Mercantile Exchange (CME) merged with the CBOT as part of a great consolidation wave. CME rolled up the CBOT's popular grain contracts and now offers them on its electronic platform. Many traders still refer to some of these contracts as CBOT grains. CME is the largest and most liquid futures exchange in the world. The CME has the heaviest trading activity — and open interest — of any exchange, partly because of the depth of its products offerings. Besides agricultural commodities, it trades economic derivatives (contracts that track economic data such as U.S. quarterly GDP and nonfarm payrolls), foreign currencies (it offers a broad currency selection, ranging from the Hungarian forint to the South Korean won), interest rates (including the London Inter Bank Offered Rate, the LIBOR), and even weather derivatives (contracts that track weather patterns in various regions of the world). Because of its broad products listing, the CME is perhaps the most versatile of the commodity exchanges. In addition, the CME was one of the first exchanges to launch an electronic trading platform, the CME Globex, which became an instant hit with traders. It now accounts for more than 60 percent of the exchange's total volume. In 2006, the New York Mercantile Exchange (NYMEX) entered into an agreement with the CME to trade its marquee energy and metals contracts on Globex, an electronic trading system. In 2008, the CME went on a series of acquisitions and purchased the NYMEX and COMEX. The CME is also the first exchange to go public. Investors greeted the initial public offering with enthusiasm, raising the stock from $40 in 2003 to more than $500 in 2006. For more on the CME, check out its website, which also includes helpful tutorials on all its products.

Article / Updated 08-16-2022

Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading. The Wall Street Journal For daily intakes of financial news, nothing beats The Wall Street Journal. If you want to be a successful trader, you need to keep abreast of all the information that’s worth knowing. The Journal does a good job of presenting solid analysis and in-depth coverage of the day’s main events. Its coverage of the commodities markets in its online edition is actually fairly extensive, with interactive charts and graphs for both cash prices and futures markets. Also, keep an eye out for the section “Heard on the Street”. It includes a wealth of information to help you develop winning strategies. Bloomberg The Bloomberg website at is one of the best sources of raw information and data available to investors. Visiting this site once a day keeps you up on important developments in the markets. The website’s commodity section contains comprehensive information on all the major commodities, including regular price updates on the futures markets. If you trade futures, this is an indispensable resource. Nightly Business Report Tune in every weeknight to your local PBS network to watch NBR’s Paul Kangas, Susie Gharib, and the gang analyze the day’s events. Their special features are insightful, and the market analysts they bring in are usually knowledgeable about the issues at hand. Plus, it’s commercial free! Check your PBS station for local listings. Morningstar Morningstar has a plethora of information on the latest mutual funds, exchange traded funds, and other investment vehicles popular with investors. If you want to invest in commodities through a managed fund, make sure you consult the Morningstar website. Yahoo! Finance Yahoo! Finance includes many different sources of information all conveniently located in one site. You have market analysis updated on an hourly basis, regular news alerts, and one of the best chart services on the web. If you’re considering investing in companies that produce commodities, Yahoo! Finance is your one-stop-shop to get information on the stock’s technical performance as well as its fundamental outlook. Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is the federal regulatory body responsible for monitoring activities in the commodities markets. Before you do anything related to commodities, make sure you look at the website. Before you invest, you need to know your rights as an investor and the CFTC is the best source of that information. Also make sure to check out their very comprehensive glossary. The Energy Information Administration The Energy Information Administration (EIA) is part of the U.S. Department of Energy and is the official source of energy statistics for the U.S. government and your number one source for information on energy markets. They cover everything from crude oil production and consumption to gasoline inventories and natural gas transportation activity. If you want to invest in energy, make sure you check out their Country Analysis Briefs, which give an overview of the global energy supply chain country by country. Stocks and Commodities Magazine If your desire is to become a serious commodity futures trader, then Stocks and Commodities magazine is a must read. Its articles include market-tested trading strategies to help you place and execute trades. Oil & Gas Journal The Oil & Gas Journal is a subscription-based magazine that features in-depth articles about the energy industry. If you want to trade the energy markets, make sure to read O&G. National Futures Association The National Futures Association (NFA) is the industry’s self-regulatory organization. If you are interested in investing in the futures markets, check out the website before you start trading. Specifically, make sure to check out the database of registered investment advisors if you’re going to go through a manager. NFA has comprehensive information on all managers through its Background Affiliation Status Information Center (BASIC) service.