Why investing in commodities such as oil, gold and cocoa beans is challenging. What you need to know before you invest.
In this episode you’ll learn:
- Why have oil prices have fallen and what will impact their long-term price trend.
- How commodity futures work.
- How cocoa beans were used as currency by the Maya.
To learn more about what you need to know to invest in commodity ETFs, check out this guide.
Show Notes
Doubleline’s Gundlach says commodities are best buy for 2018 – CNBC
Gundlach’s favorite idea in the financial markets today is commodities – CNBC
The economic implication of the collapse in oil prices – Neil Shearing – Capital Economics
If Commodities’ Day Has Come, This Fund Should Score – Lewis Braham – Barron’s
Oil Hedge Funds Struggle in Age of Algos – Stephanie Yang – Wall Street Journal
Is It Time to Hold Gold? – Steve Garmhausmen, James Grant and Dan Wiener – Barron’s
Episode Sponsors
Become a Better Investor With Our Investing Checklist
Become a Better Investor With Our Investing Checklist
Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.
Episode Summary
Have you ever wondered about diversifying your portfolio by investing in commodities? Host David Stein dives into the pros and cons of commodity investment and why it may be worth a shot…depending on the season of the economy. Jeffrey Gundlach, the founder of Double Line Capital, has been quoted as being in favor of commodities, especially late in the economic cycle, as an often overlooked hedge. But are commodity investments the best we can do? David Stein lays out the numbers, so be sure to listen in!
Energy transitions are affecting the way we should approach investing in commodities
The way we consume commodities is changing, which means changes in the cost and demand of those commodities. Oil has been falling in value, and there is too much supply with too little demand. David Stein points out, however, that volatility is normal, and we shouldn’t be completely turned off by the temporary shifts in the commodity market. What about master limited partnership investments (MLPs)? David discusses his experience with investing in energy infrastructure as the change in energy resources turns away from commodities such as oil to more sustainable options. Looking to the future of renewable energy is a must when considering whether or not to invest in commodities such as oil. Listen to the full episode to explore this vital component of investment speculation.
To Invest or not to invest: understanding the structural limitations of the economy
Sometimes, investing in commodities isn’t as easy as one would think. David goes into the issue of the contango phenomenon – a situation where the future price of a commodity is higher than the current price, costing the investor. This can be common when investing in commodities. “You can’t buy a barrel of oil, you have to buy it through a futures contract,” he points out. Since investors have to buy into the futures market of a commodity, not the current commodity itself, they run the risk of paying more in the long run due to contango. David also discusses the issue of algorithms and how trying to make investment decisions faster than the machine can be difficult.
Investment in commodities is as old as time
Even though the decision to invest in commodities may seem like a dubious one at times, David reminds us that flux in the economy of commodities is normal, and that many commodities have stood the test of time. Cocoa beans and gold, for instance, are still being traded. Listen to the full podcast episode for a surprising and refreshing story of investment in commodities being a huge success as well as new ways to view investment in gold and unusual commodities. Simple psychology plays a bigger role in how you build your portfolio than you may think.
We may never know when it’s time to invest in commodities, but we can make educated decisions
At the end of the day, how do we know whether to invest in commodities or not? David is honest in saying that he doesn’t have a clear and cut answer to easily plug into your asset allocation strategy. He does, however, remind us where commodity investment should fall in our priority list. Cash flow generating investments should still be the foundation of your portfolio, and even though the decision to invest in futures and commodities can be difficult, you are not without resources to help inform you. Be sure to listen to David explain his point of view on this informative and helpful episode!
Episode Chronology
- [0:18] Where do commodities help us in the economic cycle?
- [2:00] How to interpret the apparent statistical decline in commodities.
- [5:40] Are master limited partnerships (MLPs) helpful to your portfolio?
- [8:19] How the energy transition will affect the future of commodity investment.
- [11:43] Contango and how it affects the performance of your futures contract.
- [16:20] Looking back at the history of commodities may help in determining their future.
- [24:29] The benefits of investing in gold as a commodity.
- [28:11] Traders and psychology are really what determine commodity prices.
- [30:08] Cash flow should still be the foundation of your portfolio.
