By Brian T Mikes Editor, Dynamic Wealth Report
"Get out of the dollar… and buy as many commodities as you can" –Jim RogersTrading commodities is arguably the hottest investing trend to hit the market in years. Ten years ago, everyone was focused on the stock market and sexy technology companies. Then the focus shifted to emerging markets. China, Brazil, and India were the places to be.
Operating in the background almost completely unnoticed at this time were commodities. Investors savvy about this money making opportunity were raking in profits hand-over-fist. Now the commodity markets are finally receiving the attention they deserve.
The question is, “Why?”
It’s simple, the potential for amazing returns is huge.
Every day, billions and billions of hard assets are traded on the global markets. From corn and wheat to oil and natural gas. The items that make the world go round (and our lives easy) are traded on these markets.
Innovative new trading products make it quick and easy for just about anyone to trade commodities. A few years earlier, most investors were shut out of these lucrative markets.
You had to jump through hoops, open special accounts, learn a new trading language, and master a complex trading environment. The good news is trading commodities is now easier than ever; but more on that in a moment.
I’m sure you’re asking the same question many of my readers do… What’s so special about commodities?
Unlike stocks and bonds, commodities are represented by an actual item. You can run your fingers through a bushel of corn and you can feel just how slippery a barrel of oil really is.
Its hard assets like these that will always have some kind of value.
And don’t forget, these commodities are needed all over the world. That barrel of oil might be shipped to the US, China, India, or Brazil and converted into gasoline for automobiles.
Corn and wheat are needed in the food industry… and everybody’s got to eat!
In short, commodities touch our lives every day.
This makes it easy to understand how changes in commodity prices can impact the global markets. When the commodity markets move in a big way, traders correctly anticipating these moves can become very, very rich.
Let me give you an example.
In the middle of 2008, oil had hit a new high of over $148 a barrel. Prices had been skyrocketing for months on end. It was clear these high prices were unsustainable. Everyone was cringing when they went to fill-up at the pump.
Gasoline, which is made from oil, hit a record high. The price exceeded $4.00 a gallon nationwide (for the first time ever). The American consumer was hurting. And the country was entering a recession to boot.
It got so bad, some companies started charging delivery fees, fuel surcharge fees, and even visit fees. All in an attempt to control their rising gas and oil costs.
Then something strange started happening…
Americans started driving less.
For the first time in decades, the miles Americans were driving actually fell. And I’m not talking about a small decrease. The Federal Highway Administration estimated Americans had cut their driving by a staggering 30 billion miles over a few months' time.
Consumers were clearly cutting back.
If that wasn’t a sign of a top in the oil market, I don’t know what would be.
As you know, every commodity is impacted by two things, supply and demand.
In this case, demand was falling and supply was actually increasing. It wasn’t a good sign. Nations like Saudi Arabia and Russia were producing all the oil they could. They couldn’t pump the stuff fast enough. This was their tragic mistake. They were increasing supply as demand started falling off.
That’s when oil prices started to crumble.
It was simple supply and demand. With demand evaporating and supply near record highs, prices started falling. And falling. And falling.
Savvy traders began selling oil short in the futures markets or buying inverse oil ETFs, such as the PowerShares DB Crude Oil Short (SZO).
What happened next was truly amazing.
The price of oil fell for eight months straight.
The PowerShares Crude Oil Short ETF absolutely soared! From $25 per share to over $85 per share… a gain of 247%... in less than 12 months!
In mid-July, SZO was trading at $24.44 a share. By mid-February, it had passed $85! Every $10,000 invested was suddenly worth $34,779.
Now you know why investors focusing on commodities are doing so well.
Unfortunately, buying and selling commodities directly can be time-consuming, difficult, and very risky. Luckily, there’s a better way to get the benefits of commodity trading, without all the hassle and risk.
Let me briefly explain.
If you’ve researched commodities trading, you’ve no doubt discovered a big problem. Commodities trading can be extremely complicated.
The contracts themselves can be quite a hassle unless you really know what you’re doing. You need to learn a crazy new futures trading language. Then you need to open a new futures trading account. Fill out paperwork, transfer funds, learn new systems. All of that is a huge hassle.
Then, every trade you make risks not only what you invest, but also much, much more. Make one misstep and you could lose your house, your car, even your life savings.
But there is a solution.
Fairly recently, a number of new ETNs (Exchange Traded Notes) and ETFs (Exchange Traded Funds) have been created that focus solely on commodities. For ease of use, we’re going to refer to all of these as ETFs.
These ETFs hold either the commodity itself or futures contracts based on the commodity. When you buy the ETF, you purchase a small piece of their holdings. And the great thing is these ETFs trade just like stocks.
As such, these commodity ETFs are becoming very popular.
They offer a great way for investors to buy and sell all kinds of commodities easily. You don’t need a margin account. They can be traded intra-day and you don’t need to worry about delivery dates and expiration. You don’t even need to open up a new trading account (any old regular stock account will do).
Best of all, you know exactly how much you’re risking on each trade… no more worrying about losing your entire life savings every time you place a trade.
So, what kinds of commodities can you trade?
You can easily invest in an entire broad based commodity index like the iPath Dow Jones–AIG Commodity Index (DJP).
Or you can focus on specific groups of commodities. The iPath Dow Jones–AIG Energy (JJE), for instance, holds parts of the energy complex including oil, natural gas, and heating oil.
Further, you can drill down to individual commodities. For example, the PowerShares DB Gold Fund (DGL) trades just gold. The iPath Dow Jones–AIG Lead (LD) trades… you guessed it, just lead.
What’s amazing though is the fact you can use some of these ETFs to profit from falling commodity prices as well by using inverse ETFs on these commodities.
I could go on and on about how great these things are, but you get the idea.
Being able to pinpoint moves in commodity prices… and easily trade in and out of them… can produce huge profits.
Here’s three trades that I would look at right now.
Gold has been all over the news lately. The yellow metal is incredibly volatile. Investors are rushing in to protect themselves from future inflation and a shaky financial system.
As exciting as the returns have been in gold, another metal is seeing even more phenomenal returns.
A metal known as gold’s “little brother” or “poor man’s gold”.Yes, I’m talking about silver…
Most investors think silver is just riding gold’s coattails higher. After all, the silver market is relatively tiny compared to gold. It usually doesn’t attract much attention from investors.
But when you take a closer look, you see something very interesting…
The fundamentals for silver are very bullish. And many precious metals analysts agree… the run higher for silver is just getting started.
Why does silver has such amazing upside potential?
Well, first of all, demand for silver as an investment vehicle is starting to take off. Since it’s still cheap relative to gold, many are playing “catch-up” with silver.
In other words, many investors “missed the boat” on gold. So they’re jumping into silver to hedge themselves against future inflation at a reasonable price.
But there’s another big reason for the bullish sentiment in silver.
Industrial demand for silver is growing dramatically. Yes, not only is silver an investment vehicle, but it’s also widely used in industry. For years, it’s been used in things like photography and electronics.
But the uses for silver are expanding…
Things like solar panels, flat-screen displays, and bio-medical uses are putting more demand on the silver market. In fact, above ground supplies of silver fell by 86% in 2009.
This means silver miners are going to have to kick it into overdrive to keep up with rising demand. But the problem is they’re already “burning the midnight oil”.
This means higher silver prices are dead ahead…
How can you take advantage of the coming surge in silver prices?
One way is through the iShares Silver Trust (SLV) ETF. As the name suggests, this ETF tracks the price of silver. You can buy it easily through any broker.
Now you may think heating oil is a rather odd idea for a commodity investment. But heating oil, as you’ll see, has a few things going for it.
What’s heating oil?
It’s a petroleum product used for heating homes (primarily in the
northeastern USA). Storage tanks are filled and the oil is slowly burned
by the homes’ furnace.Heating oil is commonly seen as a “seasonal trade”. Prices fall in the spring and summer, but rise into fall and winter as demand rises due to colder weather.
But heating oil isn’t just about keeping warm…
The market for heating oil is also used a proxy for diesel fuel. You see, diesel and heating oil are both “distillates”. This means they’re produced via the distillation process in oil refineries.
Diesel fuel is widely used in trucking in the U.S. The “big rigs” burn diesel to push untold tons of goods across our interstate system each day. And diesel fuel prices are closely linked to economic conditions.
When the economy is weak, demand for diesel falls. But as the economy strengthens, demand picks up.
And we’re expecting the U.S. economy to strengthen for the next few years. This means higher diesel prices may be just around the corner.
But here’s the “ace in the hole” for diesel and heating oil prices…
Demand for diesel in Europe is surging. You see, over 50% of cars in Europe are powered by diesel… and the numbers are growing.
Why?
First of all, diesel engines are 20%-30% more efficient than gasoline engines. Second of all, favorable tax structure in Europe makes diesel fuel cheaper than gasoline. These two factors have diesel cars taking over the European market.
These trends have U.S. exports of diesel and heating oil to Europe surging. In fact, 2009 U.S. exports to Europe were five times what they were just five years ago.
And rising demand means a steady trend of rising prices awaits the petroleum distillates market.
How can you take advantage of this rising demand for diesel and heating oil?
There’s an ETF made just for heating oil and it’s diesel counterpart, it’s called the United States Heating Oil Fund (UHN). This ETF holds futures contracts of heating oil and reflects the price of heating oil from day to day.
There’s an interesting long-term trend in agriculture.
For decades, farmers have been doing a great job supplying the world with food. Advances in technology have increased agricultural productivity dramatically over the years.
These high levels of productivity have provided an abundance of food. It’s been quite awhile since we’ve had big shortages of the basic staples like corn, wheat, sugar, and soybeans.
But over the years, the population of the world has literally exploded. Back in 1980, world population sat at an estimated 4.4 billion. Yet by 2010 U.S. Census Bureau estimates, there are currently 6.8 billion people living on planet Earth.
That’s a jump of over 50% in just three decades…With more people, there are more mouths to feed. And for years, the agriculture community has met the challenge. It’s done a fantastic job of putting food on the table.
But by looking at projected growth rates, we can see world population is expected to grow to over 7.6 billion by 2020. That’s nearly another billion people in just ten years! The world’s food producers have some challenges ahead of them.
Now I’m not trying to suggest the world is running out of food…
But the fact is, the global food system needs to run perfectly in order to alleviate supply constraints.
We’re already seeing some “kinks” in the world commodities markets…
Shortages in certain grains like wheat are becoming more common. It wasn’t long ago Russia banned wheat exports out of the country due to a severe drought. Weather conditions play a huge part in agricultural commodities. If growing conditions aren’t just right, production can come up short… and prices surge.
But man made problems can throw a wrench in the works as well.
Underdeveloped shipping ports can create problems for exporters of valuable commodities. Not long ago, Brazil had problems exporting their sugar to the world. The slowdown caused an explosion in sugar prices in just a few short months.
These are the kind of supply shortfalls we’re talking about.
With growing populations, there’s no room for supply shortfalls. But when you’re relying on Mother Nature, you don’t always get what you want.
Jim Rogers, one of the most respected commodity investors of our time, said this about grain prices…
“We’re going to have much, much higher prices over the next few years… the number of acres devoted to wheat has been declining for 30 years and inventory levels of food are the lowest since 1972.”The bottom line is this…
Grain prices are set to trend higher in coming years. Growing populations, along with tight inventory levels, mean one thing… higher prices for agricultural commodities.
How can you ride prices higher?
There are multiple ETFs with exposure to grains. The one I like the best is the Powershares DB Multi-Sector Commodity Trust Agriculture Fund (DBA). This ETF holds a mixture of Agricultural commodities like wheat, corn, soybeans, and sugar. It can be traded through any broker- online or off.
Before concluding our report, let's go over how you could turn $500 into $1.3 million with commodities.
As we discussed earlier, we prefer to use commodity ETFs over futures contracts. They provide great exposure to the commodity markets without the complication, hassle, and risk you’d get in the futures markets.
And although ETFs tend to be less risky than futures contracts, the returns can be just as big. In fact, here are some recent real-life trades that could have turned a few hundred bucks into well over 1 million dollars...
| Commodity ETF | Start Amount | Return | Gain | Ending Amount |
| PowerShares Oil Double Short | $500 | +1,059% | $5,295 | $5,795 |
| PowerShares Gold Double Long | $5,795 | +81% | $4,693 | $10,488 |
| PowerShares Base Metals Double Short | $10,488 | +284% | $29,785 | $40,273 |
| iPath Dow Jones Cocoa |
$40,273 | +43% | $17,317 | $57,590 |
| iShares Silver Trust |
$57,590 | +72% | $41,464 | $99,054 |
| PowerShares Base Metals Short | $99,054 | +72% | $71,318 | $170,372 |
| iPath Dow Jones Grains |
$170,372 | +41% | $69,852 | $240,224 |
| PowerShares Commodity Db Short | $240,224 | +442% | $1,061,790 | $1,302,014 |
So there you have it.
To turn $500 into $1.3 million, you’d need eight consecutive returns of 1,059%, 81%, 284%, 43%, 72%, 72%, 41% and 442%.
So now that you see what it takes, exactly how difficult is it to get returns like these?
While a run like this might be difficult, it's certainly not impossible. Just remember, if you're able to decipher how the economy affects different hard assets - you can make a lot of money with commodities.
And that happens to be the exact reason why trading commodities is so popular right now. Commodity ETFs in particular provide a combination of benefits you simply cannot get from most other investments.
If you're not already, I strongly suggest you look at adding the flexibility and power of commodities to your investment mix. Whether you use futures or ETFs, commodities can be a great way to take a small amount of money and turn it into a lot!
Sincerely,
Brian T Mikes, Dynamic Wealth Report
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