What’s Stopping You From Commodities Investing?
In 1996 as the stock market began to climb, I began to invest in commodities such as gold, silver, and gas.
A banker friend of mine, who had suddenly found the new religion of mutual funds and the stock market, wondered why I was in commodities rather than equities.
My reply was, “Because commodities operate in a 20-year cycle. They fell out of favor in 1980. Now as we approach 2000, it’s time to start buying them while prices are low.” He scoffed at me and kept buying high-tech mutual funds, trying to fight the trend and believing his stockbroker’s advice of “buy the dips” and “dollar-cost averaging.”
As the stock market dropped, he nearly lost everything before he finally stopped buying and realized he was fighting a change of cycles.
During the stock-market boom, many first-time investors got lucky, made some money, lost their money, and invested more, hoping to get lucky again—only to lose the game.
One of the harder lessons I have had to learn is that just because I made money on one investment at one time does not mean I will make money again, even if I invest in the same type of investment.
I began to study the relationship between the cycles of the stock market and the cycles of the commodities market while a student on board the ships during my sea year. One of the things I learned was that when stocks are high, start moving out of the market and begin looking for the next market.
The lesson is, markets move on as time marches on. Investing for the long term, buying, holding, and praying, is ridiculous advice when the market is changing directions or changing cycles, such as the cycle change from stocks to commodities.
Invest in Commodities to Hedge Against Borrowed Time
The secret to surviving the next few years is keeping your wealth in real money, not in the U.S. dollar.
Buy things that hold their value and are exchangeable all over the world. Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold.
The important thing to remember about depressions is that wealth doesn’t disappear—it’s simply transferred.
Many people will be paralyzed by fear during the coming years. But for the financially intelligent, this will be the opportunity of a lifetime. For those who aren’t financially intelligent, I’d suggest at the very least purchasing some gold or silver—as much as you can afford—to protect yourself from inflation. If you have high financial intelligence, be on the lookout for deals. As asset prices crash, be ready to swoop in and buy them up.
I believe that soon the biggest transfer of wealth in modern history will come. You have the choice to be on the receiving end—or to lose it all. The dividing line will be those who are financially intelligent and those who aren’t.
One of the reasons why I’m bullish on gold and silver is because…
The American Public Is Still Sound Asleep to This Asset Class
Most Americans have no idea how or where to buy physical gold and silver. The outlets that sell gold and silver I have visited are already low on inventory.
If and when the American public wakes up to the reality that their dollars are not money, but a currency, the panic, and stampede will begin. Should that happen, today’s prices for gold and silver will look like bargains.
In fact, I believe everyone should have a little gold in their investment portfolio, as a hedge against future financial turmoil.
My first choice has always been commodities. I love gold and silver. I began collecting silver coins when I was nine years old. I went to school in New York to be a ship’s officer. My specialty was oil, and I became an officer on oil tankers.
Of course, there are many commodities that you can invest in. They include:
- Agriculture (such as soybeans, wheat, milk, and cotton)
- Livestock (such as cattle and hogs)
- Energy (such as oil, natural gas, and ethanol)
- Precious metals (such as gold, silver, platinum, and palladium)
- Industrial metals (such as copper, lead, zinc, and tin)
The point I want to make is that love is important in investing. I love gold, silver, and oil. Love makes it easier for me to study gold, silver, and oil. As you know, market prices are always going up and down. I do not mind price fluctuations because I love my assets. I want to own more. So when prices go down, I buy more.
Pros of Commodities Investing
Investing in commodities may be a great option but it’s not necessarily the right option for everyone. Let’s explore some of the pros and cons:
- Easy entry: For example, buying gold and silver coins is very easy to do. If you can buy a loaf of bread, then you can buy gold and silver. Buying other commodities has the same level of ease as paper assets.
- Increase in demand for raw material as economies grows: For example, with the growth of China and India, there is a greater demand for oil, gas, food, copper, and aluminum.
- A hedge against inflation and a falling currency: When currencies fall in value, commodities usually rise. And when investors lose confidence in currencies, they may run to commodities, especially gold.
- Tax advantages: Different commodities have varying degrees of tax advantages. Almost all are taxed at a lower rate than ordinary earned income or income from salaries and wages.
- Home-based business: A child can easily buy a couple of silver coins and follow daily charts and graphs to check the current price. Involve your children as much as possible as you invest. What a great way for them to get started!
Cons of commodities investing
- No cash flow: Most, not all, commodities do not cash flow. They are a capital-gains investment.
- No leverage: The average investor cannot borrow money to invest in commodities.
- Dependent on the economy: As the economy slows, there is a decreased demand for raw materials.
- Volatile: Commodities can be volatile with extreme ups and downs.
The Best Way to Get Rich
Many people seem to think that investing is simply throwing money at some hot deal and hoping to strike it rich, or just turning it over to a total stranger and hoping that stranger or that company returns your money to you someday. Obviously, that is not investing. It is gambling. But worse than gambling, it demonstrates a lack of respect for something most people have given a part of their life, their sweat, blood, and time for.
Most people do not like working for abusive and cheap people or abusive and cheap companies. Yet when it comes to the money they invest, many people turn their money over to people and companies that seem to care more about their own self-interest than the investors’ interests.
Warren Buffett said, “The best way to get rich is to not lose money.” One of the best ways to not lose money is to invest a little time making sure the money you invest, your personal employees, are working in a financially intelligent, high-integrity, well-managed, financially responsible, and safe environment. That is what an investor does. That is what investors such as Warren Buffett do. Warren Buffett treats money, the businesses he invests in, his workers, and his investors with a high degree of personal intelligence, integrity, and respect. That is why his company is so successful. Rich dad said, “People who do not respect money, or abuse the money they earn, are themselves often not respected or are financially abused.”
Regardless of whether you invest in businesses, real estate, paper assets, or commodities, treat those assets and your money with the same respect you want for yourself. If you will do that, those assets and your money will grow and make your life easier and more abundant. Take care of your money and your assets, and they will take care of you.
Editor, Rich Dad Poor Dad Daily