Q. How do you make a small fortune in commodities?
A. Start with a large fortune.
If you’ve been investing for a while, chances are you’ve happened upon that maxim, or a variation of it. I first heard it on the trading floor of the Chicago Mercantile Exchange, where I was a cub reporter covering the commodity markets for The Wall Street Journal in the late 1970s.
Not a lot has changed since then. Commodities — and the companies that dig them up or process them — are still sensitive to boom-and-bust cycles.
A retailer like Wal-Mart Stores, Inc. (NYSE:WMT) or a consumer products vendor such as Starbucks Corporation (NASDAQ:SBUX) might be able to deliver relatively consistent growth year after year. But raw materials like copper, coal and platinum are different — they are susceptible to the types of peaks and valleys you see in the chart below.
This cyclicality doesn’t mean there is no place for commodity stocks in even the most conservative portfolios. Investors of all stripes are profiting from commodities today — sometimes in dramatic fashion, as you’ll see below.
Here’s how we explained the phenomenon in the pages of Scarcity & Real Wealth a little over a year ago:
It’s pretty simple, really. Whenever a commodity price starts to soar, more people are anxious to dig it up. New miners enter the game, while existing ones pour cash into expansion projects to ramp up their output. Before long, everybody and their cousin are bringing in new supplies and glutting the market.
When that happens, prices inevitably begin to fall. When they get low enough, financial incentive disappears and producers decide it’s no longer worth it. Mines begin to close. New projects are delayed or canceled. In time, the supply surplus thins and turns into a deficit — causing prices to reverse course and move higher.
And if that’s the case, reasons Scarcity & Real Wealth Chief Strategist Dave Forest, the argument can be made that investing in commodities can actually be less risky — when it’s done right.
“The industry has a reputation for risk precisely because history tells us that what has gone up will go down,” Dave says. “But this also implies that what has gone down will eventually go up.”
And therein lies the opportunity. “Buying commodities that are down comes with much reduced risk of further losses — and increased likelihood of profit,” says Dave.
Remember IVANHOE MINES (OTCMKTS:IVPAF)? That’s the down-and-out junior exploration company Dave recommended to readers of his Junior Resource Advisor newsletter on Aug. 19.
When I wrote about Dave’s recommendation four days later in the Aug. 23 issue of StreetAuthority Insider, IVANHOE MINES (OTCMKTS:IVPAF) had already posted a 25.8% gain. This past week IVANHOE MINES (OTCMKTS:IVPAF) had tacked on another 19 percentage points, making for an incredible gain of 45% — in less than three weeks.