Commodities are sometimes made to look far too complicated for the average investor, and so many stay away from what is one of the most exciting and potentially profitable wealth builders for the next couple decades.
I'm going to simplify it for you, and in reality, there is nothing more to it than what I'm about to explain.
The simplicity of commodity investing? It's completely related to supply and demand. Isn't that simple? It's nothing more than that.
Having said that, I'm talking about investing in raw commodities here, not businesses or mining companies that are dependent on the quality of management, labor issues, and a plethora of other issues.
If it's that simple, than why does it seem so complicated? Most of the complications, or perceived complications are in connection to market timers or day traders, who are attempting to make a quick killing and move out of the market.
A lot of media coverage of commodities is connected to this because if offers up drama that interests viewers, and gives something for the talking heads to communicate.
In reality, market timers don't make much money, and those investing for the short term never make the amount of money those with knowledge and in it for the long term do.
So the illusion is created that commodities are completely unpredictable, and investing in them is like gambling. Now if you're trying to time the market, that's not only true of commodities, but it's true of any investment vehicle. Short term investing is gambling, and those entering into may get a high and rush from it, but they're always scrambling to make their next buck, and waiting to hit the big one.
A long term outlook and investing in a commodity itself is the foundation to success in commodity investing.
The next step is the research you do. It must be done on a continuous basis and the macro picture is the thing to be looked at.
By macro picture I mean the overall existing conditions that will determine whether prices of commodities will go up or down. Remember, you can make money in commodities whether the prices are going up or down. The secret is to look for movement, not what the direction of that movement is.
For example, if you're looking at investing in wheat, there could be drought in some regions of the world but a lot of rain in others. Either one could significantly impact the wheat harvest for any given time.
So in the short term, depending on which direction the weather is going, you could have some significant swing in wheat prices because of that.
But if you're looking at the long term, this won't be that big of a deal, as you're in it because of the demand and the ability to supply that demand.
If the demand is there, someone, somewhere, will find a way to meet that demand. It's as simple as that. You can have shortages because of a peculiar set of circumstances where the weather may disrupte wheat production in more than one important place. If that's the case, demand hasn't changed, but the supply could have. That will affect prices in the short term.
But again, it's the long term we're looking at for investing in commodities, and while those fluctuations will happen all the time, we must stay focused on demand and whether that is changing. If demand isn't changing, we can have a very accurate idea of the direction wheat prices will go in the long term future.
Just take whatever commodity you're thinking of investing in and apply these parameters to them. It takes more work with some commodities to research over others, because of the number of industrial uses they may have: for example silver, which is used in an increasing number of products, and so research must take into account demand across a number of product categories to get accurate information that action can be taken on.