I recently re-read a great book, Hot Commodities: How Anyone Can Invest Profitably In The World’s Best Market by Jim Rogers. I first read this book a few years ago when it hit the market. Now it seems as timely as ever. For those of you who don’t know, Jim Rogers is one of the great investors of our time.
In 1970 he cofounded the Quantum Fund with famed investor George Soros. Over the next few years, it’s reported the fund returned over 4,200% to investors. In the same period the S&P was up 47%.
Then in January 1999 Jim began an around the world trip – literally. Over the next few years he drove through 116 countries traversing more than 152,000 miles. Before he left on this trek he started investing in commodities.
I don’t know about you, but I look at the recent pullback in commodity prices and I see an opportunity. I’d be willing to bet that Jim Rogers is thinking the same way.
It’s important to understand that commodity prices are going up because of global demand. It’s not speculation that’s driving prices higher. I pointed this out in my last article on oil. The number of private cars being driven in China is growing by leaps and bounds.
Increasing oil prices.
The number of cars on the road are growing by more than 10 million a year. And it’s not about to slow down any time soon. Every one of those cars needs gas to run. And gas comes from oil. This is why oil prices are increasing.
The same thing is happening in traditional agricultural commodities. The Institute of Nutrition and Food Hygiene in China has this to say, “The classic Chinese diet includes cereals and vegetables with few animal foods.” They go on to say recent economic growth is causing “a rapid evolution of the Chinese diet.”
Put simply, the more developed China becomes the more meat they eat. Growing meat requires grains. Grain prices are increasing. This shift in dietary habits causes the traditional Chinese diet to look more and more like our own Western diet.
Processed foods, lots of protein, and obesity are in store for China – just you watch.
However, China is not the only country experiencing this shift. We are seeing similar shifts in other major emerging markets like India and Brazil. Millions and millions of people around the world are working their way into the middle class. And they’re going to consume more and more goods.
Growing demand leads to increasing prices. And this demand is not limited to oil or agricultural products. We’re seeing it everywhere. Precious metals, steel, concrete, copper, potash . . . the list goes on and on.
Commodity prices are going to continue rising.
The best way to profit from all this is by owning commodities. Unfortunately traditional commodity trading can be complex and risky. High leverage and low margin requirements expose you to major risk. You can lose more than you invest. Never a good thing.
Lucky for us new investment vehicles show up every day.
Recently UBS – the global investment bank – launched a number of ETNs or exchange traded notes. ETNs are a bit different from the traditional ETFs you’ve heard me talk about so much. Essentially ETNs are a note or a promise from the issuer (in this case UBS) to deliver the performance of an index. They don’t actually hold any of the commodities they represent.
Other than that, they are similar to ETFs in the way they trade. You can buy them in a traditional stock trading account. No need to worry about margin, leverage, or contract expirations.
The beauty of these ETNs is the direct exposure you get to a particular commodity. Let me give you an example. Let’s say you want to buy platinum. A few weeks ago you had two choices. You could buy a diversified precious metal ETF that also owns gold and silver and a bunch of other stuff. Or, you had to buy platinum in the futures market.