I want to show you the best way to invest in gold and other commodities. But there is something you need to know...
Commodities are risky. One of the riskiest things an individual investor can attempt.
It's estimated that 95% of individual commodity futures traders lose money. That means 19 out of 20 walk away with less than they started.
You see, commodities trading is not investing. It's speculating that prices will move one way or the other. That's akin to gambling in my book.
Really, the only people that make serious money in commodities trading are the brokers. They pocket hefty commissions from clients that speculate on gold, wheat, oil, cattle, lumber and even coffee.
But that gravy train is ending.
Wall Street's commodity trading revenues stand at just half of what they were in 2008. And the buying and selling of grains, metals, energy and other goods now accounts for a thin 6.5% slice of the overall trading revenue pie -- down from 30% five years ago.
Banks used to rake in billions, not just from commissions but from their own trading book. Now, position limits and other regulations put in place by the Dodd-Frank Wall Street Reform Act have reined in those profits. Some companies have exited the business altogether.
The smooth, quiet trading in many hard assets last year also proved to be an obstacle. That's because speculators like extreme volatility. The wider and more erratic the price swings, the greater the trading potential. It's much harder to extract profits from a flat market.
What do I think about all this? I say that futures contracts are best left to experienced pros and those who use them for hedging purposes, not sheer speculation. Betting on whether a price moves up or down (especially over the short term) isn't investing anyway -- it's buying a lottery ticket.
If you really want to invest in scarce natural resources such as oil and platinum, then buy shares in quality producers that own vast reserves of these critical goods.
Instead of a piece of paper, you'll have equity ownership in a real business with tangible assets -- one that generates cash flow year after year.
That cash can be used for exploration and development, for the acquisition of new properties, or simply to return to stockholders via dividends.
One of my favorite precious metals producers, Goldcorp (NYSE: GG), has distributed 111 consecutive monthly payments, even in flat and declining gold markets -- you won't get that from a futures contract.
And if underlying commodity prices do rise, then production growth and operating leverage usually push profits (and stock prices) up even faster. Take a look at another producer, New Gold (NYSE: NGD), and you'll see what I mean.
Back in 2008, the company sold its gold for $863 per ounce, from which a cost of $566 was deducted, leaving a profit of $297. By early 2012 the price of gold had since risen to $1,575 per ounce. But New Gold's mining costs remained basically unchanged (in fact, they dropped to $543), so profit tripled to $1,032 per ounce.
Look at it this way... an investor who bought gold or gold futures would have netted a gain of 83% over this period. Not bad. But New Gold converted that into a more powerful 247% increase in profit margins ($1,032/$297). Earnings per share zoomed to $0.44 per share in 2011 from $0.12 per share in 2009, an increase of 267%.
Since 2008, shares of New Gold have jumped 1,010%.
So if you want to get the most out of every dollar increase in the price of gold, a stock like New Gold is a superior option.
Risks to Consider: This is not to say investing in producers is without risk. Many of these companies operate in parts of the world plagued by labor unrest, unfriendly governments and other hurdles. But, with just a little research, you can find solid producers to invest in.
Action to take -- My advice is to steer clear of the dangerous futures market and invest in commodities through reliable, fast-growing, low-cost producers.
More Accurate than Warren Buffett?
Warren Buffett has beat the market 5 of the past 9 years. Since we started publishing our annual report, we've beat the market 7 of the past 9 years. And we're poised to do it again in 2013. One of our picks has raised dividends 463% since 2004. Another has returned 117% in just over 4 years. Click here for more about these stocks and even some ticker symbols.
Nathan Slaughter
Lets see if gold makes a lower low while XAU, AUY, GG, etc make higher lows before golds next up move. Gold stocks may lead a new advance if it is the real thing. I was glad to hear of a gold stock that paid out dividends, however, I would prefer taking the short and long term term capital gains. Buy low, sell high.
GG and NGD, I’ll have to admit are good stocks as both have been kind to me over two years ago when gold was in a strong uptrend. At the present time gold and the mining industry are out of favor and gold is consolidating and basing. No doubt gold and gold stocks will rebound but the question is when. The Fed is fighting deflation with QE to get unemployment down and to drive everyone into stocks thus enabling inflation). Will gold consolidate but further resume its downward direction causing the smaller miners to consolidate or will a Black Swan event send gold, and miners shooting up. Since dollars are only fiat currency and gold is true money the rebound will probably happen in good time. Meanwhile, I am done with looking for Easter eggs in the back yard and also could not find the goose that lays golden eggs.
this is absulutely wrong . after making som wrong dicision you have to make correct decision. and you must have patience and target then you will succcess.
any decision will prove right or wrong only after completing everything, so you can understand whether any decision is right or wrong just after game is over, are you having any key to predict end results of any decision, well in advance, just before taking it?
You don`t sound like a trader, what are you?
to whom you are asking for?
The way gold is behaving lately I think I will go out and search for Easter eggs in my back yard.
This matter should not be linked for comparing any specific sectors, because more then 95 % people are loosing money., please point-out, here i use word people, rather then investor or trader because EXCEPT SOME LONG TERM OR DELIVERY BASED PARTICIPANTS, NOBODY CAN BE IDENTIFY OR TREATED AS AN INVESTOR OR TRADER, ALL ARE EITHER SIMPLY SPECULATOR OR GAMBLER, REASON BEHIND IT IS VERY CLEAR, INVESTORS OR TRADERS ARE SATISFY WITH GETTING SOME SPECIFIC OR REASONABLE-CALCULATED AND AVERAGE RATE OF RETURN OR PROFIT, BUT WHEN THEY EXPECT WIND-FALL PROFITS OR RETURN BEYOND IMAGINATION, AND MOSTLY WITHOUT ANY LIMITS OR TARGETS, THEY WANT MORE.........MORE ........AND MORE.......... ONLY, THEN HOW CAN WE CONSIDER THEM AS AN INVESTORS OR TRADERS? THEY NEVER TRY TO UNDERSTAND THAT CERTAIN RATE OF RETURNS ARE NOT POSSIBLE FOR ALL THE TIME, AND FOR EVERY ONE, AND THEREFOR THEY ARE LOOSING MONEY.
Matter may be of stocks or commodity or currencies, past and future history will be remains same PEOPLE HAD LOOSE, PEOPLE ARE HAVING LOOSE AND PEOPLE WILL BE LOOSE, UNLESS THEY REALIZE MARKET RULE OF RETURNS.
Is this article meant to be an early April Fool's joke?
First, you start off comparing commodity trading to gambling. You take that conclusion and compare the results to investing in a stock over a FIVE year time period.
If you are going to make that comparison, then why not assume that a trader of gold makes money up and down over the five year time frame? (What gambler buys and holds?) Further, give the trader the benefit of leverage when calculating his returns. What? You say that's not a far comparison? Neither is cherry picking one of the single best performing gold stocks either. The GDX is LOWER today than it was five years ago, and the juniors are even worse.
Posting drivel articles like the one above lowers my opinion of INO.