Four Easy Ways to Trade the World’s Top Commodities
by Lee Lowell, Advisory Panelist
Tuesday, September 22, 2009: Issue #1099
I’m going to open the door to a “secret society” for you today.
It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.
I’m talking about the commodities world, of course.
But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…
However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”
Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options
I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.
For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?
Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.
But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.
So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…
Four Commodities… Four Explosive Moves
Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…
How would you have liked to hop aboard some of those moves?
Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.
If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.
Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.
Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.
Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.
This is some serious money folks.
And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.
Now, if you want to profit today…
Three Reasons Why You Should Trade These Four ETFs
Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.
We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.
For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:
- Oil: United States Oil Fund (NYSE: USO)
- Natural Gas: United States Natural Gas Fund (NYSE: UNG)
- Gold: SPDR Gold Shares (NYSE: GLD)
- Silver: iShares Silver Trust (NYSE: SLV)
If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…
- Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
- Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
- Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.
Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.
Good trading,
Lee Lowell
Editor’s Note: Not many investors have access to their own “pit trader.” But having spent six years “in the pits” as a market maker at the NYMEX, Lee Lowell is one of the rare few who is truly able to give investors an insider’s perspective on how the commodities world works – and the forces that drive prices. Now, this analyst and former trader gives ordinary investors the same insights that he gained from his years on the trading floor in his Instant Money Trader letter. For more details, check out this link.
The Investment U Blackboard:
~ Bring Out The Oil Bears
Monday saw another volatile day of trading in the oil market, with one statement from the Centre for Global Energy Studies was enough to send the bears sprinting for the exits: “There will be little or no sustained upward pressure on oil prices until global economic recovery is firmly established and reviving oil demand begins to draw down bulging oil inventories. Even next year, prices are unlikely to rise much unless clear signals emerge that the world is pulling out of recession in a sustainable fashion.”
Result? The price per barrel sank by over $3 at one point. Adding to the edginess was this week’s G20 summit in Pittsburgh on Thursday, plus the Federal Reserve’s latest monetary policy meeting on Tuesday and Wednesday.
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