Monday, 22 October 2012

Commodity Investing

Investing in the commodity market has never been easy or safe. As a matter of fact, it is unlike to speculate the trend in the market without having in-depth knowledge and insights. So, we are here to help you better understand the broad commodity market where we are faced with a wide range of choices. 

Before we actually go into the details of methodologies to invest in the commodity market, let’s make sure that we have a proper understanding of how to read the trend. As we have kept our eyes carefully on the market, we have noticed that in general, commodity prices increase considerably during the recession or expansionary economic development. On the other hand, the commodity market gets steadily still or slightly fluctuates at the end of recession or during the moderate economic growth. Furthermore, pricing some of the commodities is heavily reflected on the speculations of the global macroeconomic outlook. However, we have to admit that our argument is based only on our observation and knowledge and exposed to the risks of unexpected or unprecedented events.

Having said that, let’s move on to the strategies of how to read and invest in the commodity market. 


First off, we need to make sure of the different types of internationally traded crude oil. Typically, there are 2 types of oil: Brent and WTI (West Texas Intermediate)

  • Brent: It is a combination of crude oil from 15 different oil fields in the Brent and Ninian systems located in the North Sea. It is also ideal for making gasoline and middle distillate fuels - diesel and heating oil - , both of which are consumed in large quantities in Northwest Europe. 

  • WTI: West Texas Intermediate crude oil is considered very high quality and excellent for refining a large portion of gasoline. Because of the combination of distinct characteristics, WTI is the ideal crude oil to be refined in the U.S. – the largest gasoline consuming country, where most WTI crude oil gets refined in the Midwest region of the country and Gulf Coast region. Despite the decline on the production of WTI, it is still the major benchmark of crude oil in the Americas. 

  • NYMEX Futures: The NYMEX Futures price for crude oils, which we see on the news every day, represents the market-determined value of a futures contract to either buy or sell 1,000 barrels of WTI or other crude oils. 
Now, let’s turn our head to the real deal: How to make profits out of the massively traded crude oils!!

Investment Tip No.1: Brent is more sensitive to geopolitical risk than WTI, which means that the returns on Brent when tension in Middle East, for example, gets the heat would be greater than WTI. According to Bloomberg, “the market is hypersensitive to anything coming out of the Middle East”. In the recent example of increasing tension between Turkey and Syria, Brent oil actually increased by 1.5 percent whereas WTI decreased by 0.7 percent only!! 

Investment Tip No. 2: The price of crude oils has a great tendency of increase reflected on the currency moves, especially Euro V.S. U.S. For example, after the European Central Bank announced to buy the Spain’s debts in attempt to contain Europe’s debt crisis on Oct. 1st, the Euro advanced as much as 0.9 percent to $1.3021 on Oct 4th, the highest level since Sept. 21. That currency move triggered oil price to go up relatively higher than the average high for the previous weeks. Therefore, it is most likely that a strong euro against U.S. currency helps to push oil prices higher!!

Investment Tip No. 3: Global economic growth outlook affects oil prices. We have witnessed that when the economic growth in the U.S. or China is reported on daily basis, the oil prices fluctuate. For instance, oil fell below $90 a barrel on Sept 26th for the first time since early August this year on lower oil demand – triggered by the slow economic growth in China and increasing jobless claims in the U.S. – and concern that the worsening European crisis will reduce consumption. 


Investing in gold has always been in favor for those who want steady long-term returns on the investment that shields against financial crisis or economic downturns. As a matter of fact, gold price has skyrocketed since the U.S. financial crisis in 2008, and the concerns about overall economic health around the world affected by the crisis have encouraged people even more to invest in gold. As we anticipate the worsening global economy, the developed countries in 2013 are going to have to deal with their massive debt problems and policies that have spent the last few years devaluing local currencies. As this happens, gold will be the one of few havens available to investors looking to protect their wealth. Furthermore, the anticipation and realization of QE3 by the Fed has predominantly contributed to the consistent rise in assets price. Consequently, with countries around the world printing money and devaluing their currencies, investors are likely to continue investing in gold. 

Investment Tip: Follow the ETF – Direxion Daily Gold Miners Bull 3X shares (NUGT)
                                    It generated 45 percent increase on returns just for the past month. This is also used as an effective tool to play the spread between the gold and the gold miners. Since the gold has widely outperformed the gold miners in the past years, we expect the reversion of the mean, which  indicates that gold minors will be closing that spread and the ETF is considered a good player on the matter. 

As for further investment tip on the subject, please refer to one of our blogs:


Since the news and reports about the worst drought in the U.S. came out in early July this year, the corn price has surged to the record high of $8.10 per bushel.

According to Bloomberg, drought damage to corn and soybean fields in the U.S. – the world’s top grower and exporter – is eroding supplies of the nation’s two largest crops to below year-earlier consumption levels for the first time since 1974. Worldwide inventories on Oct. 1ST were 117.27 million metric tons, down from 123.95 million predicted a month ago and 131.54 million estimated this year, and reserves in the U.S. fell 37 percent to 619 million bushels from 988 million estimated this year according to the U.S. Department of Agriculture. As the tight supply escalates the price of corn while the demand is constant, we expect that the investment in the ETFs focusing on crops will be more demanding. 

Investment Tip: Follow the ETF – Global X Fertilizers/Potash (SOIL) 
                                    It is the only ETF that is pure play on fertilizers. When the corn price is going up so high, the first thing that farmers buy is fertilizers!!
                                    As the global supply of corn shrinks more, the fertilizer will be more demanding and so will be the ETF. 
                                    It has gained almost 18 percent on returns since June 1st this year. 

Bottom Line:

Investing in commodities is not for everyone. As I have mentioned earlier, it is too obscure to have a clear understanding of how the mechanism works in commodity markets. However, if we can manage the large volume of information and insights that are publicly available and properly speculate the trend, we believe that we have a shot!! On one hand, we should have some slice of our long-term money parked in commodities. On the other hand, we should resist tendency to overinvest in commodities when the financial crisis or unprecedented incidents take place due to the fact that ridiculously demanding commodities blind our mind to be rational. 

Young G.


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