Skip to main content

Caution on commodities

I read an interesting piece by John Authers over the weekend, in which the Financial Times columnist urged investors to familiarize themselves with the basics of the commodity markets before jumping in.

Since the start of this decade, performance in a wide range of individual commodities has been hot, prompting many new investors and funds to jump on the resource bull market bandwagon.

Authers reminds prospective investors that there are factors which distinguish the commodities market from other investments long familiar to most professional investors (equities, bonds), and that each individual commodity bears its own unique fundamentals and behavioral patterns.

Take it, John:

The first rule of journalism, some say, is: "Never be afraid to admit ignorance."

In that spirit, I will admit that I took over this column without the faintest idea why aluminium prices might behave differently from nickel, or why corn prices diverge from wheat. I am not embarrassed by this. The world of commodities is huge and complex, governed by the peculiarities of demand and supply in particular markets across the world. Little or nothing you learn covering mainstream financial markets, such as equities and bonds, much helps you when you are looking at a report on copper supply.

What I do know is that the past few years have seen an explosion of interest in commodities, not only from hedge funds but also from mainstream big institutions. That was prompted by the prolonged rally in basic commodity prices that started earlier this decade. The entry of new investors helped push the market still further. But my fear, confirmed at least by anecdotal evidence, is that many of these new investors share my ignorance of commodities.

You can read the entire piece here, "Go back to basics before you buy commodities".

For more info on two very important themes stressed in John's article, the increased correlation of stock and commodity returns and the "non homogeneity" of individual commodities, see, "Double down on commodities?" and, "Stocks and commodities positively correlated".

Popular posts from this blog

Finance Trends 2019 Mid-Year Markets Review

Email subscribers of the Finance Trends Newsletter receive the first look at new articles and market updates, such as the following piece, sent out to our email list on Sunday (6/14).   Hello and welcome, everyone! If you received our last email notice over the July 4th holiday, you'll know that this weekend's newsletter will serve as a mid-year market update and a follow-up to issue #29, " How to Reinvest in a Rising Market ".   Ladies and gentlemen, without further ado, let's start the show...  Finance Trends Newsletter: Our Mid-Year Market Review When we last spoke, back in February, the U.S. stock market was rallying off its December-January lows. As the S&P 500 and Nasdaq reclaimed their 200 day moving averages in February and March, it became increasingly apparent that a lot of retail investors (and perhaps some institutional investors) were left under-invested while watching this recovery move from the sidelines.  The U.S. stock ...

Jesse Livermore: How to Trade in Stocks (1940 Ed. E-book)

If you've been around markets for any length of time, you've probably heard of 20th century supertrader, Jesse Livermore . Today we're highlighting his rare 1940 work, How to Trade in Stocks (ebook, pdf). But first, a brief overview of Livermore's life and trading career (bio from Jesse Livermore's Wikipedia entry). "During his lifetime, Livermore gained and lost several multi-million dollar fortunes. Most notably, he was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively. He subsequently lost both fortunes. Apart from his success as a securities speculator, Livermore left traders a working philosophy for trading securities that emphasizes increasing the size of one's position as it goes in the right direction and cutting losses quickly. Ironically, Livermore sometimes did not follow his rules strictly. He claimed that lack of adherence to his own rules was the main reason for his losses after making his 1907 and...

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas.  Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas. In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn .  Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview: "Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda...