Commodities are an important part of our every life. Everything from grains, energy and metals come across us each and every day. Lately, commodities have become another means of diversification. Having a pure stock portfolio is no necessarily considered dangerous, but with today’s economical and political environment, using commodities as a hedge is not necessarily considered foolish as the dollar continues to decline. Out of all the different commodities, silver and gold are the two commodities that people are interested in investing.
Generally, silver and gold are used as insurance against inflation, a debased currency and global uncertainty. But like all commodities, there are different ways to invest in gold and silver.
How To Invest In Gold and Silver
Investing in Gold and Silver Through Futures
The most popular way of investing in gold and silver is through futures or futures contract. A futures contact is an agreement to buy or sell in the future a specific quantity of a commodity at a specific price. Currently, most traders investing in commodity futures are institutional or professional traders but the public is barely catching up. Discount brokers are finally giving the option for the retail investor to get in the game and also educating them , through education videos, of how commodity futures work. The main advantage of gold and silver futures is that its the real pure play on any commodity and if you understand them, you could use leverage to make good money. The downside is that using leverage can hurt you pretty bad as futures are highly volatile.
Investing In Gold and Silver Through Stocks
Purchasing gold and silver stocks has long been one of the more popular ways of investing in commodities. Purchasing stocks is easy and something the retail is more comfortable with. A bit of research is required to make sure the company is worth investing in and its actually in the commodity business. The main advantage of investing in commodity stocks is the fact that information is readily, stocks are highly liquid and are easy to trade. On the downside, stocks are not a pure play on the price of commodities and the stock price might be affected by company specific news such as a new CEO.
Investing in Gold and Silver Through Exchange Traded Funds
Exchange Traded Funds or ETFs trade exactly like stocks. It is important to understand what the particular ETF tracks. Most commodity ETFs invest in commodity futures (usually through an Exchange Traded Note or ETN. Other commodity ETFs will invest in a basket of commodity stocks. The main disadvantage of commodity ETFs is they might not reflect the point to point move of the underlying commodity (a complete explanation will come in another article)
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May 2, 2011
Commodities