Trading Commodities and Why I Avoid Them

Trading commodities can be exciting and highly profitable. Trading commodities can also be incredibly risky. Decades ago I tried various strategies for trading commodities. As I am from Canada one of the richest commodities nations on the planet, it made a lot of sense to me to get into trading commodities in Canada. Everyone I knew was into trading commodities like oil, gold, silver, nickel, wood, pulp, uranium and the Commodities Trading list goes on and on. What I didn’t see was that a lot of my investor friends trading commodities were not consistently making a lot of money doing it. Some months they did incredibly well trading commodities and other months they literally were tearing their hair out.

With trading commodities and commodities futures trading, I tried so many strategies I cannot remember them all. In the end there were just too many unknown factors and a lot of them, to me, just didn’t make sense. For example consider gold.

Trading Commodities 1 Year Gold Chart

Below is the one year gold chart. Just glancing at this chart I am somewhat surprised. Gold has been up to 1900 and now with the Euro under stress, Greece, Italy and Spain on the verge of economic calamity, the United States with a debt load so huge I doubt any economist let alone President can grasp the enormity of the hazards ahead, Gold looks like it is selling off. Shouldn’t it be going the other way?

If the world is on the verge of hyper inflation shouldn’t gold be in a major bull move right now? With the US Debt load at astronomical levels why would anyone be dumping their money into US Treasuries, currencies and what about bonds that basically are paying them nothing? Why do investors feel that the US is still the safe haven? To hear the gold “bugs” talk there is nothing as safe as gold and it should be at $4000.00 an ounce by now. So why is the chart below looking bearish? This would be an incredibly difficult commodity trading chart for me to trade against using my put selling strategies.

Trading Commodities - One Year Gold Chart

Trading Commodities and price of gold chart from June 2011 to June 2012

Trading Stocks -Barrick Gold Corp – Symbol ABX

I cannot say the same about gold related stocks however. Barrick Gold Corp which trades on New York under the symbol ABX has a very tradeable stock chart going out more than 5 years. I have traded naked puts on Barrick Gold Corp Stock for longer than 5 years and have yet to end up with any shares.

Below you can see the put strikes I have sold over the past 5 years including the bear market crash in 2008 to 2009 when I sold puts at $20.00 while the stock fell to around $17.00.

ABX Stock - 5 Year Put Selling Chart

ABX Stock - 5 Year Put Selling Chart Showing My Strikes Over The 5 Year Period

Over the past 5 years ABX Stock has been very tradeable for put selling and highly profitable. In 2007 I earned 18%; 2008 – 27%; 2009 – $31%; 2010 – $15%- 2011 – $12%; 2012 – $8%.

Total for this time period has been 111% or basically I have double my capital invested in Barrick Gold Corp. I doubt I could say the same with trading the commodity of bullion.

I wrote an article some time back comparing Gold holding against put selling Microsoft Stock. You can read that article through this trading commodities link. To spare you the suspense put selling Microsoft Stock was far more profitable than holding gold.

Trading Commodities – Oil

Among my many past trading commodities attempts was oil and oil futures. Just like gold, oil really doesn’t make a lot of sense to me. The world runs on oil. A computer could figure out daily oil use and project future use based on past and present use. Oil is everywhere and in so many products no one could name them all. So shouldn’t oil be more stable in price. Shouldn’t it be like milk? I mean milk is in demand. It is a case of supply and demand. Yet one week milk isn’t down $2.00 and then next up $10.00. What is with oil? The US stock piles too much oil and it plummets in price. A month later the US Stockpile is lower and the price heats up. A sheik in Saudi Arabia turns on the taps and sells more oil and the price drops. He does the same thing a month later and it sky-rockets. What kind of trading commodities skill is needed to consistently profit from oil year after year? I know I don’t have it and I have not met any investor trading commodities who is skilled to consistently over decades make a killing trading the commodity of oil.

I tried all kinds of options strategies when trading commodities like oil. Here and there I did very well, then I would have a number of bad trades and by year-end I would be up 12% or so. The work involved though was enormous and all kinds of factors could never be taken into account. I started investing for myself right around the time of the 1970’s oil embargo and when I looked at the price of oil I felt that oil would be a great trading commodities strategy. I had charts and trading commodities charts, commodities futures trading charts, graphs, calculators, projections, you name it. One year oil consumption was climbing like crazy but the price fell 50 percent. What was up with that? After 5 years I found I had earned about 40% in total but my 1 single oil stock trades were up 125%. I stopped trading commodities like oil immediately.

Below is a five-year chart of Brent Crude’s price. When it comes to trading commodities you have to be a great trader to do well on something like oil. I have friends who love trading commodities and they were hammered in 2008 holding crude as it plunged to $40.00. I remember a dinner out when Crude had already fallen to $80.00 and they were convinced the decline was over and they were “betting” on it rising. By the time it reached $40.00 they were all out and sitting with large losses. When I suggested that at $40.00 it was probably worth buying they told me oil was probably in a bear market that would last years. Instead oil recovered most of its losses. They started buying oil futures again at $80.00. Why not at $40? Trading commodities to me just doesn’t make a lot of sense. When oil plunged in 2009, do you think maybe at $140.oo it was just too high? This year oil got up to almost $130.00. Do you think this is a reasonable price to pay for a barrel of crude? I don’t know. Shouldn’t trading the commodity of oil be as easy as trading Exxon Stock? I mean if Exxon Stock falls to $30.00 wouldn’t it be a good buy even if just for the dividend? Isn’t is a bit more substantial to own a company that is generating profits from oil that I get to partake in? Isn’t that better than trading commodities themselves?

Trading Commodities - 5 Year Brent Crude Price

Trading Commodities - 5 Year Brent Crude Price

Trading Commodities Versus Exxon Stock

I love trading an oil related company like Exxon Stock (Stock symbol is XOM) . Just like ABX Stock, XOM stock has a great trading pattern and I never worry about the price of crude. While Exxon Stock’s pattern does follow Crude Oil prices to a degree, there is real value in the stock. Exxon stock pays a dividend has some distinct trading patterns and should I be assigned I have many strategies I can apply to work my position into a profit. I cannot same the same about trading commodities.

Exxon Stock 5 Year Chart

Instead of trading commodities I prefer the underlying stocks including Exxon Stock. The above shows many of the put strikes I have sold over the past 5 years.

Exxon Stock Trades For 2012

Exxon Stock Trades For 2011

Exxon Stock Trades For 2010

Trading Commodities – Silver

Then there is silver. As far as trading commodities are concerned silver has always been more volatile than most and more volatile than gold. Many readers might recall the reader who wrote in regarding his AGQ Ultra Proshares silver problem having bought the fund while silver was up. For those who haven’t read it you can select this AGQ Ultra Proshares Link.

Trading Commodities - Silver 5 year chart

Trading commodities - 5 Year Silver Chart US$

Instead for myself I still prefer a stock such as ABX Stock to trade this type of commodity.

Trading Commodities and Why I Avoid Them – Conclusion

It sounds almost anti-Canadian to say that I don’t like trading commodities. Trading Commodities In Canada is almost a birth right. Our nation is rich with commodities of all kinds and I have a lot of investor friends who love trading commodities. Many are very good at it. I otherwise prefer the underlying stocks especially those that pay a dividend and have a trading pattern that I can follow, understand and sell naked puts against. While many commodity related stocks have trading patterns somewhat mimicking the commodities they mine, harvest or manufacture, there are different support and resistance levels within stocks that do not always exist within the commodity itself.

I think in the end it comes down to personal preference. I have had a lot of experience with stocks and have created hundreds of different strategies that work well with stocks in every environment. My skill at trading commodities has not seen the same type of return as my stock portfolios and therefore I believe trading commodities is just not for me.