Why commodity investing is so hard

They teach you in finance classes in university that it is uniform how you value assets – just look at demand, supply and current price and figure it out. It is rarely the case – especially with commodities.
Commodities are such an important thing from our every day life (you can live without twitter but cannot go without wheat) that they are hardly left to the market to figure out the price.
In order to invest in commodities you have to drop most of your finance/economics knowledge and start looking into politics.
Take oil as example. At the moment Saudis just let the oil pour from the ground no matter what the price, aiming to harm US shale producers and punish US for supporting Iran. They also aim at the economy of their long standing local rival – Iran and also Russia’s economy as Russia supports Assad’s regime which Saudis don’t like. So it pays the Saudis to sell under production cost just to gain more political power and influence in the middle east.
Another example are gold and silver. Except their industrial use, they are considered by many as money and counteract fiat money and central bankers. That’s why gold and silver are so hated by bankers. They are ready to manipulate markets even though they might lose money just to suppress sound money and promote fiat ones, keeping monetary world order at it is. That’s exactly what happens every day with silver market – banks manipulate it through the instrument of derivatives. Deutsche Bank got busted but they are just the tip of the iceberg.
For some commodities, a huge problem is their high concentration in a few countries. For example, palladium and platinum are 80% mined in South Africa and Russia. Russia is one of the most insecure mining jurisdictions, SA not so much but having huge problems in the sector also. So any political distress, strike etc can move prices in a grand way for long period of time. Russia can easily destroy the market with a political decision to stop exporting or nationalize mines.
Some commodities are very tiny markets which makes them an easy target for manipulation. For example only 20$ bln of physical silver changes  hands for an year. For example Apple stocks trade with a pace of 4$ bln A DAY. So small markets make them easy to manipulate. That was the case with JP Morgan, Goldman Sachs and Morgan Stanley and the aluminium market, the Hunt brothers and the silver market and many more.
So far to even touch most of the commodities, you have to be an expert in politics, power plays, monetary policy and a couple of other things before even reaching out to the supply and demand stuff. 
When you get to demand and supply economics, you will learn that figuring them out is not easier than the previous part. Just as an example from the silver market, consider the following: you need to know the prospects for the zinc and lead industries as most of the silver comes as a by product; you need to know industrial uses so that you can figure out how much silver industry will need and what may drive ups and downs there (more than half of the silver goes for industrial uses); you need to know investor sentiment as investment use is a huge factor also (many times decisive); you need to know mine economics to figure out what prospects are there for the world mines to increase or decrease output (finding and developing a profitable and large scale mine is like finding a specific grain on the beach).
Getting very negative already? Lets advocate a little for the positive side. It is not all frogs at the end of the day.
First and foremost reason to invest in commodities is that you can get excessive returns. Nothing in the stocks world compares to the commodities’ bull market gains. The fact that prices are manipulated a lot means that huge deviations occur from the normal. So if you learn cycles you will outperform. At the end, fundamentals always play out and things balance. ALWAYS. So hard thing about commodities is being right, being disciplined and being patient. Having that, 50 – 100 bagger returns would be the norm for you.
Commodities’ market keeps general public aside. That is very good – popular investments among the public are bad investments as a rule of thumb. Being hard to figure out it also gives great pleasure if you happen to be right.
Another reason is that commodities are interesting. To even start investing there, you need to learn many things from various domains – for example you will learn that silver is the best insulator, palladium is good to clean diesel emissions and platinum is good for the gasoline ones etc.
As a conclusion, i would say that if you want exceptional returns, are curious, patient, disciplined and ready to be competing in one of the harshest markets out there – fear not and go with the commodities.

Leave a Reply

Your email address will not be published. Required fields are marked *