Commodities Trading: Worth It?

In today’s economy the market is anything but stable. Every day presents a new opportunity for the governing administration to say something or tweet something off the cuff (as the President so loves to do) that can send stocks plummeting or soaring, depending on his mood. This makes it very difficult for investors–especially new investors to be able to predict their financial futures with much certainty at all. The fact that there are still people buying, selling, and trading stocks is a miracle in and of itself.

That said, there are some markets that offer more stability than others. The best among them is the commodities market.

You might have noticed that commodities trading has been a trending topic in the news–financial and current events–lately. This is because bitcoin was recently finally classified as a commodity. Bitcoin, for the uninitiated, is a controversial cryptocurrency that blasted onto the financial scene a few years ago. Since it’s classification as a commodity, however, it has earned some legitimacy among non-web-friendly investors who want to make sure they’ve got a toe-hold should the market grow. These investors, unlikely to build their own mining supercomputers to mine for bitcoins themselves, have taken to using mining services offered by companies like Genesis Mining to keep their bitcoin wallets fat.

While being awarded the “commodities” classification is certainly a boon for Bitcoin, new investors should note that there are many other commodities available that are worthy of investment. Commodities, you remember, are physical products that can be produced by a wide variety of companies without much difference seen in the end result. Grain, oil, livestock–these are all examples of commodities. Investopedia describes commodities this way:

“Some traditional examples of commodities include grains, gold, beef, oil and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.”

Commodities are good investments because, unlike stocks or government bonds, their value isn’t dictated by popularity or brand loyalty. The value of a commodity is determined almost exclusively by supply vs. demand (you likely learned about this in high school). For example, people will always need to eat food. So, the people who produce the ingredients that make our food will always be important, whereas the value of a company that produces a food-based product (like crackers or candy or even a restaurant) can vary depending on trends and unforseeable circumstances like an unexpected celebrity endorsement…or a Presidential tweet.

Of course, there are those who insist that commodities are a terrible investment. In an article for the Wall Street Journal, Rick Ferri insists that commodities are “dead money.”:

“Commodities are like dead money. They do not pay any interest or dividends and are not expected to earn any return over the inflation rate. A bar of gold does not generate any cash and will never turn into two bars of gold. Year after year it just sits there, costing you money in storage, insurance and perhaps a management fee if you invest in a gold ETF…The only thing commodity funds have going for them is the hope that someone will pay a higher price in the future. Of course, if your timing is wrong, you’re going to join the millions of investors who have suffered losses speculating in this asset class.”

This is certainly a valid argument. Unlike a stock, which can double its value overnight, commodities are steady. They are, for those who are energized by the volatility and unpredictability of the stock market, boring. Like the cows in which you can invest, commodities plod along, never changing much. Hopefully one day they will be worth more than you spent on them, but that might take a long time.

If, however, you are a new investor or someone who prefers a “play it safe” portfolio, commodities offer you stability in a market that shows no signs of calming down any time soon. And hey, now that you can buy bitcoin and bandwidth, you can now feel like your portfolio is a little more “hip” than it used to be!