If you believe we are in a commodities supercycle, there are several ways to take advantage.
1. Commodities Trading
The most direct path to benefit from a commodities supercycle is trading or investing in commodities. However, these markets are often very complex and volatile. And this makes them a risky and less-desirable market for the average retail investor.
If you want to dip your toes into commodities directly — which is not recommended for most people — the best way to do so may be by buying futures contracts. This is an agreement to buy a specific amount of a commodity at a specific price on a specific date. If the market price goes above the contract price, the investment is profitable. If prices go down, it’s a loser.
To get some of the same benefits with less risk, you may want to look at options trading. An option gives you an option to buy a commodity at a specific price on a future date, similar to a futures contract. But an option is not an obligation. You can let your option expire without further consequence than perhaps losing the money you put into it. And the most you can lose with a typical options trade is your initial investment. But again, these strategies are complex and are best left to experts.
2. Mutual Funds and ETFs
Mutual funds and exchange-traded funds (ETFs) offer more diverse exposure to commodities markets. Depending on your goals, you could be interested in index fund ETFs that follow specific commodity prices or indices.
- You could take a longer-term approach by investing in a group of stocks that would benefit from a commodities supercycle. For example, you could buy a fund focused on a specific industry or sector you believe will benefit.
- Buy a diverse fund like an S&P 500 index fund or Dow Jones Industrial Average fund. These are made up of many stocks that could see some benefit from a large economic recovery.
Last but not least, you could invest in specific stocks that will benefit from certain commodities. If you think gold is on the way up, you could look at a gold mining company, such as Barrick Gold (GOLD) or Newmont Mining (NEM).
Some stocks could give you exposure to just about every commodity out there. Or you could invest in a diverse investment company that works to profit from commodities prices. With this type of investment, you profit from someone else’s hard work.
As long as you balance risk and reward and understand where you’re investing and why, you can set yourself up for a unique investment portfolio geared toward your specific investment thesis or goals.