Including Commodities in Your Investment Portfolio

July 2, 2009 by  
Filed under Commodities Trading

The S&P 500 index displayed a general upward trend from 1974 to 2004, but during this same time period the Commodity Research Bureau (CRB) showed the opposite trend. CRB trends are much like the Dow Jones Index, using complicated mathematical calculations and combinations of commodities price points to indicate a general direction of movement.

Weighted averages are used when considering the price of oil, orange juice, gold and wheat, and many investors continue to profit when including both stocks & commodities in their portfolio.

How are profits realized in commodities trading when the general trend is downward? Well, these indices don’t include detailed daily price movements that active investors and commodity brokers take advantage of. Differences between daily highs and lows still have the ability to create profits no matter what the general trend of the commodity may be.

A general understanding that stocks & commodities prices usually move in opposite directions allows the educated investor to use this knowledge to his advantage. Historical trading strategies typically account for these trends as well as differences in individual commodity trading results.

Some investors believe that going against the general public’s actions in the market allow for alternative and positive results. This strategy is true for various investment types, including stocks &commodities, and within separate categories of them.

All successful investors understand the importance of a well-rounded and diversified portfolio for long-term growth and hedging against risk. Stocks, cash, bonds and sometimes commodities, considered a short-term investment, can be part of this overall trading strategy. Inflation will affect different types of investments in different ways as well. In certain economic climates, prices may increase; in others, they will fall.

Specific types of commodities are also known to historically rise, such as oil. Several years ago, it was trading at a fraction of today’s price. Precious metals such as gold have exhibited price patterns subject to your personal opinion. Prices for gold were at a high thirty years ago, but dropped and held steady until 2003, when it rose 40% once again.

Several investors claim the price of gold will continue to rise in the near future, and are hedging their bets that this is true. This is why the commodities market trading is so volatile, though – individual speculation can lead to great gains or detrimental losses.

Other investors prefer to maintain the investment strategy of sticking with what works, and consumers will continue to buy such commodities as coffee, sugar and oil. However, over time the increased demand may also lead to lower supplies and exponentially higher commodities prices.

Hot commodities such as gold and oil may provide some very profitable sessions in the coming years with increased liquidation and lowered reserves available. Maintained or increased demand of these products by consumers will consistently drive the prices of them upward.

If you’re considering adding some of these hot commodities to your portfolio, consult a commodity broker to discuss the appropriate investment strategy for your personality and goals.