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Commodities advice?

edited May 11 in Other Investing
I tend to make an above-average effort trying to follow the various developments around the world and have a relatively larger commitment to foreign investments to keep an eye on.

I have recently come to believe in a thesis that there is a substantial likelihood of a spike in commodities prices over a year timescale: first-and-foremost in Europe but, by extension, in some other regions as well. Specifically, this includes all top European commodity imports but energy and organic chemicals may be particularly affected.

I have not invested much in commodities before, so would appreciate any advice and/or suggestions on how to best take advantage of the opportunity.

Comments

  • edited May 12
    There are gold and oil funds.

    Then there are diversified commodity funds.

    STATIC/FIXED Allocations: DBC [K-1], GSG [K-1; 70% energy], etc.

    DYNAMIC Allocation: PDBC [1099], COMT [1099], USCI [K-1], etc.
  • I own BCX which is about 1/4 energy, precious metals, agriculture and industrial metals. The holdings are companies and not physical assets. It pays monthly dividends and uses an option strategy to help with the distribution.

  • @Mitchelg : Is this a long term holding ?
    Thank you, Derf
  • I agree with you, @yugo, that commodities may be a good sector to take a bet on. A commodities index basket like DBC is a good way do it, but man, the sector can be volatile. I'm taking a more conservative approach to commodities using COM, Direxion Auspice Broad Commodity Strategy ETF. I started a holding about a month ago.

    If interested, here's some info from their website.

    https://www.direxion.com/product/auspice-broad-commodity-strategy-etf?utm_source=PPC-Paid-Search&utm_medium=Text&utm_source_platform=Bing&utm_campaign=NL_Product_COM&keyword=etfs%20commodity&msclkid=b02c7c1e8c281a5e3d591a5e6fdd74ce
  • edited May 12
    Commodities is THE ONE sector that stands high atop my investment No Fly Zone.

    I've tried to gainfully invest directly in the sector a coupla times since 1980. I have NEVER outperformed the S&P with any commodities investment and I have usually LOST money. Sometimes, pretty BIG money.

    My worst? Energy and Oil. Just Say No!

    My best? Gold and Gold Miners. If you must, I kindly suggest using legendary poster uncleharley as your market timing guide.

    Tough love here, so take my comments with a proverbial grain of salt and PLEASE do not be offended. Just trying to help.

    Here goes: Your OP comments reek of the same type of crap that I used to spew to myself just before taking the commodities plunge.

    STOP and look at your comments objectively, if possible:

    You say:
    "I have recently come to believe in a thesis that there is a substantial likelihood of a spike in commodities prices over a year timescale..."

    I hear:
    I have a new, bright investment idea but I'm pretty sure it's going to require unusual market timing abilities to be even reasonably successful.

    You say:
    "I have not invested much in commodities before..."

    I hear:
    I am a prime candidate for a cold call from a broker at one of the major commodities exchanges [ICE Futures U.S., the Chicago Board of Trade, the Chicago Mercantile Exchange (CME), and the New York Mercantile Exchange (NYMEX)] asking me if I would like to set up an account.

    I will ask them how much it takes to open an account.

    They will say, "Well first sucker, how much do you have to lose?"

    Note that I had that very conversation (save the "sucker" reference!) several years ago with a broker at CME. I foolishly laughed it off at the time, and went on my merry way, investing instead in commodities ETFs and OEFs.

    Here's hoping you at least consider NOT doing the same.
  • I have done well in commodities and companies that produce them recently, primarily due to exposure to oil and uranium.

    The "story" that you hear especially for oil and energy is that there is significant underinvestment in production as oil companies are no longer pouring money into finding reserves. Maybe, but the fact that energy is one of the least loved SP500 sectors by itself is very useful information, and is probably a counterweight to heavy tech exposure.

    ETFs that buy futures have tax issues as 40% of profit is taxed short term, and a lot require K-1s.. Many just buy the indexes, and some of those are very heavily weighted to energy.

    You should know what you want.

    I also think an active manager can add value but remember if prices go up, the expiring contracts have to be replaced at a higher cost so it is almost automatically "sell low nad buy high"

    There was a more extensive discussion her of COM a while back.

    BCX invests in equities of commodity related stocks, as do several good natural resources mutual funds like GRHAX and DNLAX. Most of these are heavily weighted to energy but if you look carefully there are funds that also include gold silver uranium and some other commodities.
  • edited May 12
    Yikes. A very broad area. Commodities can be very volatile. I’ve lost more than I’ve made in them over the years, mostly in QRAAX , which Oppenheimer scuttled a decade or more ago.

    - A real old timer is T. Rowe Price’s PRNEX, a “natural resources” fund - just one variation on the commodities theme. The scoop on that one is it is “cyclical”, doing well in good economies but losing more than average in downturns. But aside from perhaps precious metals, that’s the nature of commodities.

    - Price has one that’s a bit more focused - PRAFX. Not strictly commodities. A lot of real estate. Worth a look.

    - CMCAX (Commodities Index Fund) is rated gold by M* - I’ve never owned it.

    - I’ve owned GGN (a CEF) in the past. Exposure to precious metals, industrial miners, energy. Prone to strong stretches of outperformance and underperformance as well - as CEFs tend to be.

    - I’ve also owned BRCAX in the past. Uses derivatives to invest in commodities, Worth a look or small hold for newbies. You won’t make a lot, but shouldn’t loose a lot either. Apparently it employs hedging strategies that limit damage in bad markets,

    - PRPFX is broadly diversified across equities, fixed income, precious metals, real estate and natural resources. But it is certainly not considered a “commodities” fund. I’ve owned it forever. Depends on how much risk you want to take. This one’s lower risk than my other suggestions.

    *None of these are recommendations. Just suggestions based on my limited experience in the area.
  • Several years ago, our MFO contributor, Lynn Bolin wrote an article for Seeking Alpha, COM: searching for the best commodity funds
    https://seekingalpha.com/article/4493298-com-searching-for-the-best-commodity-funds

    The article requires registration. Short summary : COM, Direxion Auspice Broad Commodity Strategy ETF is the choice, as @MikeM mentioned above too.
  • Thanks for the advice, everybody!

    Its a good starting point for research.

    Please post any other suggestions you might have.

    Also, I mostly invest in funds but am game for individual stocks / other securities in smaller amounts to spice up the portfolio, should you have any to recommend in the commodities area.
  • stillers said:

    Tough love here, so take my comments with a proverbial grain of salt and PLEASE do not be offended. Just trying to help.

    No offence taken whatsoever. On the contrary, I'd asked for advice and sometimes the best advice is straight-up critique.
    stillers said:


    Here goes: Your OP comments reek of the same type of crap that I used to spew to myself just before taking the commodities plunge.

    STOP and look at your comments objectively, if possible:

    You say:
    "I have recently come to believe in a thesis that there is a substantial likelihood of a spike in commodities prices over a year timescale..."

    I hear:
    I have a new, bright investment idea but I'm pretty sure it's going to require unusual market timing abilities to be even reasonably successful.

    I think I should have been clearer: from following world developments, I have come to believe that there is a fairly high chance of a commodities market squeeze, particularly in Europe, over the next year (w the clock starting to tick in say a month or two and the likelihood really increasing in six month or so).

    The only point I am 'pretty sure' about is that a market squeeze leads to price appreciation. In all fairness, I did not - and, by-and-large still do not - have any bright 'investment ideas' beyond this which was why I had asked for advice.

    I do not think, however, that this is as much about 'market timing' in the conventional sense, i.e., this is not about timing the securities market but the actual goods market. What happens to the securities market is incidental to my reasoning, though it would very likely lead to appreciation. To make this more concrete by way of an example, a number of years ago there was a fire at one of the main silicon chip foundries that led to a lot of sector volatility in both stocks and goods prices. I did not try to time the 'stock market' and bought after the dust settled some days later because I believed that irrespective of the short-term stock market moves, the underlying electronics 'chip market' would be squeezed by the shortage. So, I bought some unaffected companies and waited. It took a couple of quarters but - when the squeeze inevitably hit - this turned into a very good trade.

    I view this situation in analogous terms with two differences:

    1. The underlying commodities market dynamics is a lot more complicated vis-à-vis the comparatively straightforward chip market.

    So, I could be wrong and the squeeze does not happen, though I think there is a fair likelihood that it will. However, one thing I am pretty sure of is that there are no places for the extra supply to come from and no reason to think that the demand will decline. So, basic economic reasoning - and I welcome any critique to this argument - tells me that at worst prices will stay roughly the same (sans, seasonal adjustments), so all I am risking is opportunity cost.

    2. Unlike the chip market, I do not know and cannot easily pick the securities to best benefit from the potential squeeze, should it arise.

    This was my main problem. Hopefully, I've got good help with that through all the posts to my question! (I still need to go research the recommendations.)
    stillers said:


    You say:
    "I have not invested much in commodities before..."

    I hear:
    I am a prime candidate for a cold call from a broker at one of the major commodities exchanges [ICE Futures U.S., the Chicago Board of Trade, the Chicago Mercantile Exchange (CME), and the New York Mercantile Exchange (NYMEX)] asking me if I would like to set up an account.

    I will ask them how much it takes to open an account.

    They will say, "Well first sucker, how much do you have to lose?"

    Note that I had that very conversation (save the "sucker" reference!) several years ago with a broker at CME. I foolishly laughed it off at the time, and went on my merry way, investing instead in commodities ETFs and OEFs.

    Here's hoping you at least consider NOT doing the same.

    No, no one has cold called me about this. But why 'you laughing it off' was "foolish": sounds like you did not get hoodwinked by a broker and invested in ETFs/OEFs, did this not work out? Do you think you might have done better with a broker? Am I missing something?

    I know you've said that you are a 'sceptic' on commodities, so I would be curious to hear what you thought of my reasoning above. I am not really looking for a multi-year investment and - with the global commodities prices bouncing at the bottom of a two-year ~ - 40% DD - I do not see a high likelihood of a significant loss, even if the squeeze I am expecting does not materialize within a year. Any thoughts?
  • edited May 13
    I agree with @stillars on the general thrust here. Commodities are a lot riskier than they might appear. You’re at the mercy of weather patterns (coffee, corn, coca); geo-politics and govt. regulatory changes (oil); labor unrest, rising fuel costs, environmental issues and lawsuits galore (mining); and lots of other hard to predict factors. Personally, I prefer to own broadly diversified funds with some commodities exposure. One I own is at 15% commodities at present. When younger I played with a number of specific natural resource / commodity funds. For very long haul PRNEX is pretty well run.
  • Derf
    I have owned BCX for several years and consider it a long term hold.
  • Sorry for the delay in getting back to the OP questions about my comments - a LOT going on in our lives right now.

    Briefly, suffice it to say that my opinion is that Commodities (generally) are NOT a LT hold, but instead a sector play that requires expert timing on BOTH the BUY and SELL side, and a play therefore best left for professional investors.
  • I agree with @stillers. I tried investing in commodities through various stock funds and Pimco’s offering with no success. I’m a buy- and-hold investor, and all it seemed to do is add more volatility to my portfolio. Fortunately, I didn’t lose my shirt, but I didn’t make much if any money either. The best success I had was with FNARX, which gained a lot I initially and then lost it all. I sold when it broke even again.
  • edited May 21
    It’s fun to play around in this area for experienced investors. RIO is one of several I’ve played with in recent years. What I’ve learned is gambits like that need to be kept small because of the heightened risk. And in small scale they really don’t move a portfolio that much (but may contribute to heartburn). Applies to most stocks - not just the one cited.

    Gold is rising and etf flows have picked up. May well go to the moon. But it will come back to earth and you don’t want to be holding a lot when it does. I bought gold coins in the 70s when the metal spiked to over $800 and it was all the talk of the town. I sold 3-4 years later at $400. It later got down to near $300.

    I looked and looked for “value” in the commodities sector a couple months ago. Looked at OEFs, ETFs, CEFs. Some good funds. But none appeared undervalued. All had already been bid up. But - very likely there’s something out there I missed.
  • I purchased a broad based actively managed commodities fund a couple of months ago managed by AQR— ARCIX. Based on my review it had the best risk-reward available among actively managed funds. And that is the only way I will invest in commodities. It is likely
    a fund that I will hold through the election. Commodities are doing well right now in the elevated inflation environment as well as with heightened geopolitical risks. I’m up since I purchased it. But it isn’t a long term hold
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