As you may recall from the previous posting on commodities that using our model the number of opportunities is quite limited. Commodities tend to move in fairly long cycles and typically there will be times when their are no worthwhile opportunities and other times when we have many to choose from. The chart below shows the number of trades open in any given month out of a sample of 14 commodities:
As you can see most the opportunities came in the early 1990s and the early 2000s. This could suggest the next buying cycle could come soon.
How to Invest
One way to invest for long term (a few years) is to buy an ETC (Exchange Traded Commodity). ETF Securities have a good range of different commodities for a 0.49% (0.39% for Physical Gold) annual expense ratio. ishares also have a small range of precious metals at cheap expense ratios; Gold 0.25%, Platinum 0.40% and Silver 0.40%.
The table below shows the net expected annual returns for a list of popular commodities:
Natural gas looks by far and away the most attractive commodity investment at present. However it is currently downtrending and a reversal of the trend is needed before investing.
As you can see Natural Gas has has an enormous price fall from 19 to less than 2 in the last 4 years. The last time it broke it's 100 day high was the middle of 2008 at over 19, so waiting for it is definitely safer.
Wheat looks good at present. It's just started an uptrend so is relatively safe to invest but the returns aren't that impressive at about 4.5% a year. If you're really desperate for a commodity to invest in then this is probably the best choice at the moment.
As for Gold? Well it looks too expensive for our model at present. Historically it's very high and has just started a downtrend breaking it's 100 day low. Best to avoid.
The best course of action looks like waiting for Natural Gas to turn its trend around and break through its 100 day high. With such a high expected return the rewards for waiting on this one could be well worth it.
See also: Part 1, Part 2
Updated for July: Commodities