By Brian T Mikes Editor, Dynamic Wealth Report
"In the last five years, hundreds of billions of dollars have flowed into the commodity futures markets..." –New York TimesTrading 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 are 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 8 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 3 trades that I would look at right now.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.” -Alan Greenspan
Look around. Governments all over the world are spending billions to stimulate their economies. Guess what, they’re not raising taxes to pay for this stimulus.
Nope.
They’re just printing money. More and more money.
It’s a known fact that the US Government is increasing the money supply. The Federal Reserve even acknowledges it. They’re literally dumping money by the bucketful out onto the streets. The printing presses are running 24/7.
A billion here, a billion there. As the famous saying goes “soon it’ll add up to real money.”
$250 billion for the banking system. A few billion more for infrastructure projects. A few hundred billion for economic stimulus. Add in money “loaned” to AIG, and you’re talking about trillions of dollars.
What’s all this money going to do to the markets?
Eventually, it’s going to cause massive inflation. Don’t believe me? Just look at Germany after WWI. Back then it took a wheel-barrel full of money just to buy a loaf of bread.
Or look at Zimbabwe today. The government there keeps printing more and more money. Their latest issue was a billion dollar note (last I heard it was worth less than 2 US Dollars).
Although it probably won't get that bad, can the US Dollar be far behind?
It’s scary to think about the impact of inflation. Our purchasing power is literally disappearing. The value of our assets are dwindling. There’s only one way to combat inflation. Buy hard assets. The best hard assets are commodities…
And, the best commodity to own right now is GOLD!
There’s a huge opportunity to profit from the coming inflationary boom by buying gold.
Now, you could go into the futures markets and buy gold contracts directly. Or, for a much easier way to own gold, look at the PowerShares DB Gold Fund (DGL).
As the name suggests, the ETF tracks the movement of gold. The fund buys gold futures contracts. As those contracts increase in value, the value of the fund goes up.
I think gold could make a big move as inflation starts to become a problem.
“Unless large aluminum producers make deeper cuts in output...prices will take years to recover...” – Wall Street Journal
Industrial Metals are used everywhere. Lumped together as a group, metals like aluminum, zinc, and copper touch our lives every day.
These metals are used in the homes we live in, the cars we drive, even in the computers we depend on every day. You could sit down for 6 months and think of nothing but products using these metals.
Now, despite their popularity, the use of industrial metals is falling.
Blame the slow economy. Blame the fall off in new homes. Blame the falling demand for automobiles. It’s all tied to a poorly performing economy. The worse it gets the farther demand falls.
Here’s the challenge.
Despite falling demand, many producers are refusing to cut back on supply. I guess they’re worried about the economic upturn coming too quickly. Doesn’t seem logical to me, but hey… we might as well profit from it.
Now, this isn’t restricted to aluminum. We’re seeing this same situation in copper, lead, and zinc. Frankly I think it’s the old greed over fear thing. These managers remember the good times from not too long ago and haven’t adjusted their thinking.
Back then they could sell all they could produce and get top dollar. Now, those days are long gone… but the hope remains.
We’ll see, I’m sure, a few of these smaller production companies hit tough times. They might go bankrupt or be bought by the bigger players. Either way, once demand starts falling out of the market, well see prices turn up in a meaningful way.
Until then, there’s only one direction for these industrial metals to go… and that’s down.
To profit from this, you could short the individual commodities on the futures exchange. But that’s complicated, expensive, and risky.
A better way is to use an inverse (short) ETF. The best one for base metals is PowerShares DB Base Metals Short ETF (BOS). I could see this investment really take off over the next few months.
“The International Cocoa Organization predicts that supply will fall faster than demand in the global cocoa market, which is likely to push prices still higher.” – Wall Street Journal
Chocolate… it’s not just for Valentine’s Day anymore. You can get rich from it as well, but more on that in a moment.
Chocolate is one foodstuff that’s adored the world over. It’s eaten by
the bar, incorporated into desserts, and even finds its way into special
sauces (Think Mexican mole). Over the last 30 years chocolate
consumption has been steadily growing. Recently the chocolate world was rocked by supply shortages. Cocoa (the main product in chocolate) is produced primarily in the Ivory Coast and Ghana. Their production issues spread throughout the commodity markets.
Then sugar prices, another raw ingredient, increased as well.
The finished price of chocolate started moving higher. Strangely enough demand didn’t seem to fall off. It makes sense. Many people see a small bite of chocolate as a just escape. Something small and inexpensive to take their minds off current economic hardships.
Everyone the world over loves chocolate. And that means a never ending demand for the cocoa bean.
Now, one major trend is pushing cocoa prices higher.
Amazingly, it has nothing to do with cocoa or chocolate. This trend is the steady fall of the British Pound. Strange I know, but follow my observation.
The biggest market in the world for cocoa is in London. In that market, as the value of the British Pound falls, the price of cocoa actually goes up!
It’s a little complicated to explain, but here’s the important point.
The pound is widely expected to fall for at least the next few months. This means the price of cocoa should skyrocket higher. If you play this right, you could make some serious money very quickly.
Once again you could go into the futures markets and buy some cocoa contracts. Or an easier way would be to buy the iPath Dow Jones–AIG Cocoa ETF (NIB). I could see this trade moving steadily higher for several months or more!
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 8 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
P.S. Our research group has just put together a FREE report on an obscure government regulation that can pinpoint - with amazing accuracy - which commodities are about to skyrocket. Called the 'Title 17 Profit Plan', it may be the single best strategy we've seen to take advantage of the coming boom in commodity prices!
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