Your Questions About How To Invest In Commodities

Mark asks…

How to invest in the Jim Rogers International Commodities Index?

Does anyone know how to invest in the Rogers International COmmodities Index (http://en.wikipedia.org/wiki/Rogers_International_Commodity_Index) by Jim Rogers?

Is there a ticker for this index? When I try “RICI” multiple things come up.
Also, can this index be traded from online brokers like Scottrade and Etrade?

Any direction is helpful.

John answers:

Check out the links below to help you in your research.

Carol asks…

investing in commodities?

good or no good? why ,and some sources to research about , and how would be greatly appreciated .thanks.

John answers:

I am an economist and a professional investor. Generally speaking, stay away. Except, possibly for precious metals, the only reason for an amateur to hold commodities is as a hedge against price changes. Gold, in particular, acts as an alternative currency around the world and holding it can be an alternative to holding US currency. Silver, platinum and palladium have significant industrial uses and so their price is determined both by their value as a precious metal and by their value as an industrial material. The only other hedge a consumer might look at are gasoline hedges.

I knew someone I couldn’t talk out of buying heating oil futures. He believed that because winter was coming heating oil prices would rise. Of course this was true, but it was already priced into the heating oil futures price. He lost money AND he was right. What I tell people, who are not professionals, who want to buy a commodity contract is what would you do with 10,000 pounds of bacon should a crisis close the market near the end of the contract period (like Sept. 11th did) and you are obligated to take physical delivery of the bacon?

Do not buy commodities you do not really want unless you know what you are doing.

Skip the online reading, it is designed to make you want to buy commodities online. If you are near a major university and it has either an agriculture or mining program, there will almost certainly be economics courses on commodities. Pick up as sophisticated a textbook as you can read. I happen to be at a University that is among the world leaders in commodities economics. Many of their graduates end up on the floor of the CBOT or the CME.

If you need them or have a good understanding of their dynamics, really good understanding, they can be a very good investment. They are also good as a hedge against certain types of market shocks. They are dangerous in the wrong hands.

Helen asks…

How would I be able to buy a call or put option on the Euro vs. the US Dollar? I don’t want unlimited risk.

Any advice is appreciated. I used to play options a lot though it’s been several years. I’ve never invested in commodities or currency.

John answers:

You would buy or sell the future. There are no options on currencies, are there?
Or you could spread bet.
The quote on June EUR/$ is 15436-15448
You buy so much a point (or sell)
I am not an expert on this but you could for example buy £10 a point (cent). If it moves to 15450-15452 you make £10 x 4=£40
Actually I have just spotted near & far options daily and weekly
the weekly eur/$ 15650 call is 0-8
the weekly eur/$ 15850 put is 374-388
If you buy (or give money) for a put or a call then the premium paid is your maximum exposure. I don’t know how they work in terms of contract size etc. We will have to wait for an expert!

Thomas asks…

Commodity Investing in India?

Jim Rogers suggests INVESTING in commodities.But I am not sure how one does that.For example sugar is low priced now and will remain so even into the next year-how does one take advantage of this?Can the method of commodity indexes of passive investing be replicated on a smaller scale by us?Is it possible to buy low and then sell later as with stocks?
NB:Neither Jim Rogers book nor commodity index funds are available where I am.As for ETF there is only an ETF for gold.

John answers:

Huge range of ETF exist in USA = in UK we still have a few (check out iShares)

Ruth asks…

How do i invest in Gold(commodity) ??

how do i invest in gold issit just like the stock market where i need a broker or remiser??

which website should i go? im in malaysia?
whats the minimum to buy??

John answers:

It’s interesting that people will say not to buy gold because it’s trading near it’s all time highs, yet it’s these same people that were clueless when stocks were trading beyond their historical highs, making new highs, and their mantra was/is “Buy, buy, buy”. Yet it’s these same people that look at 1 aspect (price) and get hinged on it and will make a recommendation solely on that item (in this case price).

Is gold trading above it’s highs made in 1980? Sure, but you can not judge an investment on price alone. I hear people saying that gold (and physical commodities) are in a bubble. It amazes me how people have all of a sudden become experts in spotting bubbles, yet these are the same people that totally missed the stock bubble of the late 90’s and the recent housing bubble. Not to toot my own horn, but I saw the stock bubble and housing bubble and when I spoke about it, people called me a fool and “burned me at the stake as a heretic”. But I do not feel that gold is in a bubble – YET.

Here’s why. Adjusting for inflation, gold should be trading somewhere north of $2200 per oz. It’s recent all time high of $1033/oz. Is less than 50% of the inflation adjusted price. Also, let’s take a look at a few other things. The last stock bubble was centered around the internet and tech stocks. The NASDAQ went from low of 327 in Oct. 1990 to 5,048 in March 2000, a 1,443% gain in 10 years. Gold was fixed at $35/oz. And when Nixon closed the gold window and gold was allowed to float, it went from $35 to $850 in 9 years, a return of 2,329%. Now, let’s look at this. The greatest part of the 1,443% gain of the NASDAQ occurred from the Sept. 1998 low of 1,556 and reached it peak at 5,048 by March 2000, just 18 months. It took 8 years to go from 327 to 1556 (a gain of 1,229 points), yet only 1.5 years to go from 1,556 to 5,048 (a gain of 3,492 points). It took less than 1/4 the time to go more than 2.8 times the distance. In 1971, gold was fixed at $35/oz. After the Bretton Woods agreement came to an end, gold rose. By Nov. 1978, gold was at $192/oz. It took 7 years to gain $157/oz. Yet, 2 years later, gold topped at $850 an oz, a gain of $658 in just 2 years. It took gold a little more than 1/4 the time to go almost 3.5 times the distance.

Yet, look at gold now. Gold bottomed after a 22 year secular bear market in 2001 at $250/oz. It is now 7 years into a bull market and even if you take the all time high of $1,033/oz., that’s only a return of 313.2%. Yet, the NASDAQ saw a bottom to top gain of 1,443% and gold a gain of 2,329%. So, based on these figures, how can gold be at a “top”? Even if you took a total gain equivalent to the NASDAQ of 1,443%, that means gold would need to reach $3,857.50 per ounce to hit it’s final bubble price. If you took that gold gain in it’s last bubble of 2,329%, you’re talking about a bubble peak price of $6,072.50/oz.

Based on these numbers alone, gold has quite a way to run before hitting it’s final peak. Even if you look at the inflation adjusted priced of $2200/oz. You’re still talking about a 151.8% increase in price from current levels, or $1,326 additional per ounce from current levels.

In addition, one gentlemen (who’s name slips my memory now) pointed out a very salient point. One of the key components of a bubble is an increase in supply of the asset in the bubble that does not comport with true demand. In the tech bubble of the 90’s, companies were going IPO and lighting pace, companies were cranking out new issues and when the demand dried up, there was a huge overhang of supply. In the housing bubble, population growth was about 1.15 million per year, yet builders were building at a rate of 2 million units per year. When demand dried up, again a huge overhang.

But, what the poster above has failed to do is take into consideration the fundamentals underlying the rise in gold. First, where is there a huge overhang in gold supply? For over a decade now, gold demand has been outpacing supply by something like 2,500 metric tons per year. In addition, gold reacts to inflationary pressures. The U.S. In it’s attempt to stave off recession, is pumping the money supply which is inflationary. The major world’s central banks are doing the same. That’s why we’ve seen the price of virtually everything go up – food, crude oil, gold, etc. What fundamentally has changed recently regarding the mess the U.S. Is in and the world in general?

You have posters saying that now is the time to get into stock. Based on what? On nominal terms, the Dow is only 10.53% from it’s all time high, but in real terms, the Dow is trading above it’s inflation adjust price, so therefore, the Dow is actually OVERVALUED. Yet, gold in nominal terms is trading above it’s 1980 highs and below it’s current all time highs, but is still 60% BELOW it’s real highs, thus gold is very UNDERVALUED right now. Yet, you have the above poster saying now is the time to get into stocks. Okay, the Dow is 10.53% below it’s all time high and he’s advocating stocks, yet gold is currently 18.23% below it’s all time high and he’s saying to avoid it. Huh? His argument is so biased that his own analysis condemns him. Based on those figures alone, he should be shunning stocks as well as gold.

And again, what has fundamentally changed with the U.S. Economy? This was all started by the fall of the housing market, yet if you look at the ARMS resets, we are 1/3 through the reset cycle. The bulk of ARMs resets will complete by 2012 – another 4 years down the road. So, if the stock market has reacted like in has and gold has reacted like it has relative to the housing market and the housing market is barely 1/3 through it’s reset cycle, what makes anyone think that “it’s over” and gold is finished and jump back into stocks?

The people and posters that are ONLY looking at price are making a serious error in judgment. Does that mean that gold will continue to go up? No, not necessarily. BUT, one must look at the underlying fundamentals driving prices. All physical commodities (grains, meats, softs, metals, etc.) are reacting to the inflationary policies of the world’s central banks, that’s why prices of everything have been going up and why there are food riots around the world – for example, a pound of rice in Haiti was a few weeks ago at $43.

So, to answer you question, no you do not need a broker. The first poster recommended GLD which is the gold ETF and you’d need a broker for that. But, to buy physical gold, you just have to find a refiner or seller of bullion. I recommend Kitco at www.kitco.com. Since you’re in Malaysia, contact them and see if they’ll ship worldwide. If they don’t, they can probably recommend someone that will ship to Malaysia.

EDIT:

Aaron, you seem to forget that in 1929, the market lost 89% of it’s value before it bottomed. The NASDAQ Composite lost 78% of it’s value from 2000 to 2002. The NASDAQ 100 lost 83% of it’s value during that same time frame. So, where am I a complete moron when history and undisputed facts shows that it has happened – as recently as a few years ago.

You say you’re not biased, yet you tell the asker “why would you buy gold when when it’s near it’s all time high”. Yet, you fail to answer the question in my post above. The Dow is currently 10% below it’s all time high and gold is 18% below it’s all time high. According to your own statement, why would you by near it’s all time high. Yet the Dow is closer to it’s all time high then gold is and you say “buy stocks”, “Don’t buy gold”. Your statement is hypocritical. If you were truly unbiased and based on the statement you made in your answer, you’d tell the asker to not buy either as both of them are near their all time highs – and like I said, the Dow is closer to it’s all time high then gold. And you fail to take into consideration that gold is only 7 years into a new bull cycle. Yet, stocks have been more or less in an uptrend for the last 26 years (except for the 2 years from 2000 – 2002), yet you believe that stocks have not run their course, yet gold has.

If you read my post carefully, you’d see that the major blow off stages of bubbles have a very rapid growth rate in the final stages. Compared to the bubbles in the NASDAQ and gold in the 1970’s, gold has not yet entered it’s final blow-off stage. The NASDAQ saw a rapid growth in it’s final 2 years, when it had already seen a 376% increase in value from 1990 to 1998. Gold saw a rapid growth in it’s final 2 years when it had already seen a 449% increase in it’s value from 1971 to 1978. Based on that historical perspective of bubbles, gold is right on schedule to move into a the final blow-off stages that will probably last for about 2 years and could push gold prices to $3,300/oz. Based on historical data. But, the US is currently pumping the money supply at unprecedented rates and if the dollar moves into a full blown currency crisis, then $3,300 would be cheap. Don’t believe me? When Germany pumped their money supply to unprecedented rates after WW 1, the price of gold went from 170 Reichmarks per oz. To 87 TRILLION Reichmarks per oz., that’s how badly the German currency was devalued. Why do you think the price of oil, gold, wheat, corn and basically every other commodity has gone up in price? Demand is part of it, but the major factor is the world central banks pumping their money supplies and driving inflation.

But hey Aaron, I’ll go even one step further. Not only will I state that we will eventually see the Dow trading in the 1000 to 2000 point range, but I w

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