The Benefits of Investing in Commodities through Exchange Traded Funds (ETF’s)

The Benefits of Investing in Commodities through Exchange Traded Funds (ETF’s)

Source: http://i.telegraph.co.uk/

Part of my purpose in life is to help others.  I think, even if I don’t gain from helping others, it is still worth it.  I help others because God helps me and that I must decrease and He must increase.  Anyone with good intentions and willing to learn should help others.

That said, I think there are many benefits in investing in commodities through exchange traded funds (ETF’s).  I’m glad investors have options to invest in ETF’s.  It gives them an opportunity to diversify and it is much more feasible.  Imagine buying physical gold or silver and choosing to sell at a local pawn shop.  The money you get will not even be close to the market value.  But on ETF’s, the buying price and the selling price are closely matched.  It is also safer.  Having actual commodities on hand might require additional security.  Having stocks in a fund that holds them don’t. 

Here are some additional reasons why investors (and people should invest) in commodities:

1) Beats inflation

A dollar back in the 1980 is not the same buck as it is today.  In fact it is worth $2.87 in 2014 (Source: http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1&year1=1980&year2=2014).  Every year, there is about a 3% inflation rate.  That means the money we have in savings and banks, which generate hardly any interest, is decreasing in value.  You lose money if you don’t spend it or invest it.  Especially with the Federal Reserve pumping $50 billion dollars per month into the money supply.

The price of everything is going up, however, if you invest your money, which is not backed by anything of value (fiat currency), into something of value, such as oil, gold, silver, something tangible, then that commodity, along with other factors, will be pegged to inflation.  

One concept many people don’t realize is there are two ways the government can generate revenue.  One is to raise taxes, a highly visible and unpopular method.  The other is to increase the inflation rate through the Federal Reserve, a stealthier and less noticeable approach.  Both results in a decrease in buying power.  

2) Commodities will always have value / won’t go bankrupt / safer than companies

My personal opinion is this: That no matter how much each of us researches on a company, which is time-consuming in itself, we will never know everything about a company because we are not insiders.  At any given time, a seemingly healthy company, although unlikely, may go bankrupt.  The accounting arm may cook their books.  There are numerous ways a company can do to give an impression that it is strong.  I’m not saying don’t invest in companies; there is a proper way to do so.  

Commodities, on the other hand, won’t go bankrupt.  Since the company is the commodity itself, it will never go out of business.  Well, unless people decide all of a sudden that gold is worthless, but that is probably not going to happen.  Commodities will always have value.  Oil is needed to run the engines of modern society.  Gold and silver, which is not only valuable since ancient times, are needed in various industrial applications.  People need to eat; Wheat will always have value.  Investing in commodities is much safer than investing in companies and it can also generate great returns if invested wisely.

Investing in commodities is also better than gambling.  I don’t really see it as gambling in the traditional sense because commodities will always have value and its value will always be adjusted for inflation.  I see it as another bank account, although more volatile.  And even if you “lose” in this gamble, you don’t really lose much.  If a person gambles in Vegas and lose, for example, that person will probably lose all their investment and the odds are for the house.  But if you “lose” in commodities, which is just buying at its peak, you probably will still retain 80% or 70% of its value.  Stupid people invest in lotteries and casinos.  Smart people invest in stocks and commodities.  

My picks for commodities

The adage “buy low and sell high” rings true in commodities.  It is poor advice for company shares because a company that does poorly will tend to do poorly while the company that tends to do well will continue to do well.  

In general, since we don’t know the times (only God knows), the best time to buy any commodity is when it’s at its low.  And the lower the commodity gets, the more you should buy.  Don’t sell out, don’t bail out!  If it’s at its lowest historical point, it is buy buy buy.  Be patient.  Eventually, the commodity will recover and you will get the returns.  Remember, commodities will never go bankrupt.  

With that said, these are my choices for the beginning of 2015:

Source: http://businessdayghana.com

1) Oil

Principle ETF: USO (United States Oil Fund)

Expense ratio: 0.45%

Average monthly volume: 24.7 million

(Source: http://etfdb.com/etf/USO) 

Oil is now at or near historical lows.  It was more than $100 a barrel in 2011 but that is now halved. A reason for the decrease in oil prices is competition from oil shale companies.  OPEC recently decided to decrease the price of oil in an attempt to drive those shale companies, many which is based in these U.S. states, out of business.  It costs more to get oil from shale then from petroleum.

Source: http://d.ibtimes.co.uk

2) Gold and silver

Principle ETF for Gold: IAU (COMEX Gold Trust)

Expense ratio: 0.25%

Average monthly volume: 5.6 million

(Source: http://etfdb.com/etf/IAU/)

Principle ETF for Silver: SLV (Silver Trust)

Expense ratio: 0.50%

Average monthly volume: 8.7 million

(Source: http://etfdb.com/etf/SLV/)

Gold and silver have both seen a recent decrease in prices from its peak in 2011.  Traditionally, people invest in precious metals when they feel that the national economy or the financial systems of the government is poor or unsafe.  With inflation at 3% a year, our high US national debt, and our USD currency no longer backed by gold or silver, gold and silver will generally continue to increase.

Figure 1: Historical Graph of Gold

Source: http://goldprice.org/gold-price-history.html

Source: http://griles.files.wordpress.com

3) Your eternal future

I saved the best for last.  The best investment anyone can make is for their eternal future.  Let me ask you this question: If you were to die today, where would you go?  Heaven or hell?  In the long-run, these investments are nothing.  We will be walking on streets of gold.  We won’t need oil to move around.  You say science can’t prove the Bible, well, your intuition can.  Science can only measure three-dimensional space (or if you include thoughts, feelings, psychology, then four).  God exists in more dimensions (some say seven) because he is omnipotent, omniscient, and omni-everything.  He exists outside of time.  Just because science can’t prove Him doesn’t mean he doesn’t exist.  In fact, he prefers it that way, for without faith, it is impossible to please God (Hebrews 11:6).  You can’t put God on a chart.  So test and see that the Lord is good (Psalm 34:8).  You will find that the God of Abraham, Isaac, and Jacob is the true God and the God who loves us.