Commodities. Make Money From The Salt of The Earth.

Grain, coffee, wheat, corn, hogs, cattle, soybeans, metals, gold, palladium, oil and gasoline. If you can grow it, feed it or rip it out of the ground, you can trade it. That's commodities baby.

The purpose of this article is to take a long term view of profit potential in these markets. We’ll talk a bit about the futures market as well. People ask how much money you need to start trading futures. I’ve read between $5,000 - $10,000.

How do you know you’re ready to trade futures? When you can douse $10,000 with gasoline right in front of your wife. Then laugh as you drop a lit match on it.

Over the long term commodities are a good investment. And playing the futures market isn’t the only way to make money.

Commodity prices are determined by supply and demand. You don’t have to worry about orange juice missing quarterly earnings or a cattle being accused of accounting fraud.

Prices for food based commodities are affected by weather, growing patterns and how much is in storage. Physical commodity prices for oil, metals and uranium are determined by discovery, country usage, storage, politics and war.

What are some factors driving prices up lately? The main factor is China. In about 20 years they will become the world’s largest economy. And they’re consuming raw materials like nobody’s business. They need to grow and heat the place while they’re doing it.

Exports of scrap steel from America have tripled. China leads the world in imports of iron ore, copper, steel and soybeans. It comes in second in terms of oil and energy consumption. As the years go by it will probably take first place.

Due to demand for wiring and plumbing, China has boosted the price of copper by almost 50%.

Demand from ethanol producing countries has doubled the price of sugar. Can’t pin that one on China. Although ethanol has been taking a bad rap lately due to the anount of energy used to produce it anf the effect on the environment.

Then we have oil. There's plenty of debate on what’s causing the high prices. Are Saudi supplies running low? Is Iran causing havoc? Is OPEC playing with the spigot? Or are oil companies just not refining as much?

If you watch CNBC long enough you can choose your favorite answer to all those questions.

Another factor for the high price of materials is the weakening dollar. See, we can’t blame this all on China.

Traders will buy commodities in other currencies since the weakening dollar makes them cheaper. Same thing goes for gold. When the dollar weakens, gold looks attractive. Hence the rising prices.

There are several ways to profit on this. I mean, if you’re paying a $100 to fill up your SUV, you might as well find a way to make money off it.

Futures If you trade futures regularly than about 60% of your trades are losing trades. And that’s if you know what you’re doing. If you hit a few home runs in your winning 40%, you’ll do well.

Let’s look at soybean futures. If after studying last year’s crop, weather data, food trends, storage and delivery costs you feel the price will rise several months from now. Go long soybeans and buy the contract. You'll profit buy selling the conttract in the open market in the future. You'll have to put down between 5% - 12% margin.

If you don’t manage your margin requirements you can be wiped out if things go against you. By the way, futures are pure speculation. The words “retirement savings” should never be in the same sentence as “futures.” You can also short futures.

Commodity contracts each have their own language, specifications and concerns. It’s better to become an expert in one or two than trade everything from orange juice to copper.

Let’s look at other ways to invest:

There are funds that track an index such as the Dow Jones AIG Commodity Index. This index tracks 19 different products. The advantage of investing in a broad index is lower volatility and the products are not correlated.

This fund tracks 24 commodities including oil, gas, cotton, coffee, gold, silver and livestock. Energy accounts for the bulk of it's value.

I want to say one word to you. Just one word. Are you listening? Commodities. - The Graduate

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