How to Play the Commodities Markets

Financial planners, hedge funds and brokerage firms all must dig deeper and think out of the box for their clients in the new age of resources and commodities. Investors need to also diversify their portfolios to include at least a percentage of commodities.

This is important as a limited hedging tool against rising prices in commodities such as energy and food. We all feel the pinch at the pump when we fill up our cars and at the store when we fill up our grocery cart. These high food and energy costs and inflation in general can do a lot of damage to the stock market, and one effective way to hedge is by using commodity options on those exact commodities causing inflation.

The average investor is scratching his or her head at this point and saying, "Yes, but how do I do that?"

Don't let the term hedge scare you off or intimidate you. This is exactly why I wrote my book. I want investors who understand preferred stock but have little understanding of livestock to feel comfortable asking for an explanation. There's no sense in intimidating potential commodity investors with fancy words such as "contango" and "backwardation" without a simple, straightforward explanation.

Contango, for example, is simply a market condition in which the price of a commodity for future delivery is higher than the spot price or current price. Backwardation is the exact opposite of contango. A backwardated market will show that the price of a commodity for future delivery is lower than the spot price or current price.

See, it's simple. The words sound mysterious and complicated, but they're really not.

Today's resource boom is in full swing, and it will likely last several more years until it reaches a peak. Investors have never had a better time to learn about and trade commodities and add yet another excellent investment option to their portfolios.