We All Have Innate Knowledge of Commodities

You Know More About Commodities Than You May Think

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One of the things that most people do not realize about the commodity markets is that everyone on planet earth has a tremendous amount of innate knowledge. Living in the world, eating and consuming energy directly put us all on the front line as raw material consumers.

We All Use Commodities Every Day

When we go to the supermarket and buy bread, sugar, coffee, bacon, orange juice, or a myriad of other necessities we are buying commodities directly.

When we fill out tanks with gasoline or our homes with heating oil, we are directly consuming those oil products. When we flick a switch in our homes to turn on a light or the air conditioning, we are buying power which is a product of natural gas, oil or coal. When we activate the faucet for a glass of water, the pipe that brings the water to the glass often contains copper. When we wrap our leftovers in foil to save for lunch the next day, we are consuming aluminum. Those are examples of our direct consumption of these commodities.

Indirect use is even more ubiquitous. When you purchase a seat on an airplane, you are paying in part for the jet fuel that powers the aircraft. When you buy a manufactured product part of the cost includes the shipping from the factory. The cost also includes the price the manufacturer paid for the equipment necessary to produce the product which likely contains metals or raw commodities of some sort.

We Are Sensitive to Changes in the Price of the Commodities We Use

The point is that we are all consumers of these commodities in our daily lives. We are all sensitive to the price we pay for goods. When we go to the gas station one week, and it costs $30 to fill the tank and the next it costs $35 we tend to remember that difference.

We are far more cognizant of changes in commodity prices than changes in the prices of stocks, bonds and currencies as these assets rarely impact our daily lives.

Using Your Innate Commodities Knowledge for Investing

Since we have this day-to-day almost innate sense of commodity prices, we should learn to use that information to improve and enhance our investment activities. When we make investment decisions, we should think past the financial data that companies supply on a quarterly basis and think about how commodity prices affect the profitability of the companies in our investment accounts.

As an example, we may own energy businesses in our IRA or other savings accounts. If those firms are refiners of oil into oil products, we have direct exposure to the processing spread for refining crude oil into oil products like gasoline, heating fuel, jet fuel or other petroleum-based products. As the processing (or crack) spread moves higher, those companies earn more profits, as it moves lower, profits decline. Since we follow the price of gasoline on a consistent basis, as we fill our gas tank, it is easy to transfer that knowledge to our investment portfolio.

There are many examples of how the prices of the raw materials we use in our everyday lives affect the value of our investment portfolio.

The more you think about this concept, the more applications you will find. Eventually, as your sensitivity to commodity prices increases it will become easier and less risky to make direct investments in commodities. Commodities can be the most volatile assets of all; that variance can mean a tremendous amount of opportunity for profits and earnings on our savings.

The same vehicles used for investments in financial markets are available in commodity markets. Futures, options and ETF and ETN products are standard fare in the world of commodities investing. Just like there are sectors in the stock market, there are sectors in the raw material markets.

  • Precious metals are hard assets and often act as a proxy for currencies during a troubled time as they tend to attract buying during periods of fear and uncertainty and selling during periods of calm.
  • Energy markets are staples, and all people and companies around the world consume energy to power their lives and businesses.
  • Agricultural raw materials like grains, meats, and soft commodities are food staples. All people need food for sustenance and companies that make food products require the agricultural commodities as inputs into their finished goods.
  • Industrial commodities are the basic building blocks of society, our cars and homes all include these raw materials. Businesses often need these metal and minerals to produce and manufacture their goods.

The human brain contains a tremendous amount of knowledge learned over many years. As citizens of the world and consumers of food, energy, and other products we all have a base of understanding of commodities even though we rarely think about it or utilize this information. Next time you consider any investment at all, think about how commodities impact that investment and then bring your experience into the equation. The historical database in your head will surprise you and will enhance your decision-making ability.