Commodities generally trend upward with inflation. They are especially risky, however, because they are very sensitive to supply and demand imbalances.
Precious metals and fossil fuels such as gold and oil are special classes of commodities - I discussed them in previous posts. Some manufactured items, passive integrated circuit chips for example, are sometimes called commodities. But generally a commodity is a direct agricultural product (think wheat, corn, and cattle) or a mineral (think copper, aluminum, and iron).
As with oil, you can invest in commodities through futures contracts, a contract to take delivery of a specific amount of material on a specific date. Futures contracts are for pros. Unless you are a commodities professional or you run a farm or a mine – stay away from them.
A more reasonable way for an individual investor to get involved in commodities is to buy the stocks of agricultural or mining companies. Shares of limited partnerships and trusts for mining and forestry companies are also available on the stock exchanges. And, finally there are ETF’s (exchange traded funds) that specialize in commodities. Commodities provide inflation protection at a higher risk than other strategies.
I own common stock in one mining company, Southern Copper (ticker PCU), and shares in one mining trust, Mesabi (ticker MSB), for my own account. MSB is a steady high yield dividend payer. PCU pays a dividend that varies wildly with fluctuations in the price of copper. And, although copper fell along with everything else recently, I expect it to go back up as demand in China increases.
Still, I consider PCU my riskiest inflation hedge as well as potentially the most rewarding.
Links to the Inflation Protection Special Report
Part 1 - The Need
Part 2 - Gold
Part 3 - Oil
Part 4 -TIPS
Part 5 - Consumer Staples
Part 6 - Commodities
Part 7 - Summary