Americans should be painfully familiar with inflation. Grocery prices are soaring, gas is considered cheap if you can get it for under $3.50 these days and paychecks just don’t go as far as they used to.
Don’t get mad at inflation, though — get even. The fact is while the raw material prices are rising and pushing up the cost of finished goods, you can share in the profits of these producers by making strategic commodity investments.
Now might be your best opportunity to buy in, too, as some commodities have rolled back significantly in price. If you invest before the steady upward march resumes again, you could enter into these opportunities at a good price via commodity-focused exchange-traded funds.
Here are six commodities that are volatile, but could be good long-term investments for folks who want to make inflationary trends work in their favor — along with the ETFs investors can use to tap into profits:
Oil
Unlike gold — which most commonly is used in jewelry and as a hard-asset investment — oil is a commodity that actually has a real use in the world. Thus it is more tied to the economy than to investor sentiment.
And obviously, the economy hasn’t been all that grand. Oil hit a peak of around $115 earlier this year before slumping on soft demand. But consider that less demand doesn’t mean there isn’t growth. The International Energy Agency revised down its forecast for this year and the next but still expects worldwide oil demand to rise by 1.2% in 2011 and 1.6% in 2012. And in the long term, global energy use is expected to jump 53% by 2035 thanks to red-hot emerging market growth.
Tie that in with OPEC cutting back after a stop-gap increase to offset Libya production shutdowns earlier this year — and the prospect of future supply disruptions due to the “Arab Spring” in the Middle East.
Yes, the global economy does not have the thirst for oil it once did. But supply issues remain and demand still is growing. If and when the economy turns a corner in 2012 or 2013, expect crude oil — and profits at leading oil stocks — to spike dramatically.
Long-term investors should consider a buy now in energy-focused ETFs like the iShares Dow Jones US Energy Sector ETF (NYSE:IYE). This fund holds positions in some of the biggest names in Big Oil, giving you built in diversification and a focused play on the sector — and pays a nice 1.5% dividend to boot.
Grains
It has not been a kind year in grocery store aisles. The U.S. Labor Department reported recently that consumer prices are suffering the hottest pace of inflation since November 2008. That’s largely because of rising prices for grains. The price of corn has soared more than 60% in the last year or so. Soy prices are up more than 20% in the last year and just hit a three-year high.
There have been some bumper harvests lately, and some food commodity prices have seen big selloffs. But the reality is that the worldwide demand for food has nowhere to go but up. Consider that China ordered 21 million bushels of U.S. corn in one fell swoop this July — more than the U.S. government thought the country would buy in a year!
Unlike gold and platinum, there are no easy or accessible ways to invest directly in grains. But investors who want to play the foodstuff boom might want to consider the Market Vectors Agribusiness ETF (NYSE:MOO), which focuses on agriculture and food companies that feed the farm industry — like seed giant Monsanto (NYSE:MON) and the maker of those iconic green tractors, Deere & Co. (NYSE:DE).
Coal
The story of coal is a story of China, plain and simple. The People’s Republic derives more than half of its energy from coal power plants but has a mere 13% of the world’s reserves. It is a huge importer of coal, and its appetite is not going away.
Despite some recent hiccups in Chinese manufacturing and signs that its GDP growth is cooling a little, coal prices have been soaring. That’s because of bad weather affecting mining output and other supply constraints. The conditions recently led a Citigroup analyst to predict a spike in coal prices above even these levels — as much as a 20% rise to about $350 per metric ton.
So what does that mean for you? After all, most Americans have little exposure to coal — beyond the version used in our grills. Well, if you’re an investor, you should pounce on this commodity as an investment opportunity. Because while coal prices remain sky-high, the supply issues have resulted in sharp selloffs for many coal stocks. The theory is they will not have nearly enough product to take to market to capitalize on these high prices, but that trend simply can’t last long.
Consider the Market Vectors-Coal ETF (NYSE:KOL). The fund is off almost 30% since July, but coal prices haven’t budged. Stocks eventually will rebound as production ramps up once more and profits flow freely again.
Copper
Energy and food commodities theoretically have strong baseline demand because people have to eat and keep the lights on. But copper is the commodity that is perhaps most closely linked to economic growth. It is used in new home construction as plumbing pipes and in electronics as wiring, among other uses.
But the global slowdown has put a damper on copper prices. The metal has plummeted almost 30% so far in 2011 as the world economy struggles. Supply has been ample, and demand has been weak.
But copper might have found a floor. After bottoming out under $3 earlier this month to set a 14-month low, copper prices have climbed by double digits and stabilized. What’s more, in the long term you can expect copper prices to rise as the economy eventually recovers.
Whether that recovery is a few months or a few years away, however, is anyone’s best guess. But if you want to play the rise in copper prices, consider the Global X Copper Miners ETF (NYSE:COPX). This fund holds some of the biggest copper producers on the planet and certainly will rise as copper prices do.
But be warned: It’s down more than 30% so far in 2011 as soft demand has brutalized the sector. You could be buying a bargain, or you could watch copper stocks bounce along the bottom for a while until demand firms up again.
Gold
Gold prices hit a record above $1,900 per ounce in August. Now they are under $1,700 — a 10% decline. Some think that gold’s gains are all in the past, and that the yellow metal will move sideways at best for the next several months.
Don’t be so sure. Consider that the “record” for gold is not inflation-adjusted. The true record would be around $2,400 in 2011 dollars based on 1980 valuations. A tumultuous time, to be sure, with global unrest, inflation and economic uncertainty. Sound familiar?
What’s more, accessibility to gold is greater than ever before — which means tapping into greater demand than ever before. Consider the SPDR Gold Trust ETF (NYSE:GLD) or the iShares Gold Trust ETF (NYSE:IAU). Both allow you to buy gold just like you’re buying bullion — only you do it with a brokerage account like shares of your favorite blue-chip stock. No buying a safe to store gold, no messing with coin shows — just buy online and profit as gold rises.
Gold is the quintessential “save-haven” investment, and as things remain rocky on Wall Street, you can bet that gold will remain in favor — and at the very least reclaim the $1,900 level in the next year or so.
Platinum
Platinum, like gold, was trading at dramatic levels recently. The metal was approaching $1,900 per ounce in September, then crashed, and it currently is trading around $1,500 per ounce for a 20% decline.
Will platinum bounce back? Maybe. A look at the history of gold vs. platinum prices shows that gold typically trades at a price lower than platinum — not on par or above, as it is now. If you believe that trend will bear itself out again, it implies that either gold will crash or platinum will move significantly higher.
But it’s not that simple. The appeal of gold right now is largely as a safe-haven investment — and while platinum might indeed share many of the same characteristics as a rare and precious metal, it just doesn’t share the same glitter as gold does. And aside from catalytic converters, there just isn’t much industrial or economic demand for platinum.
All that said, a rising tide could lift all boats and platinum could rally with other commodities. If you want to play this trend, consider the ETFS Physical Platinum Shares (NYSE:PPLT), a fund that tracks the performance of platinum prices.
Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the aforementioned stocks. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
