This column was originally published on RealMoney on Jan. 26 at 4:02 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here .
In his State of the Union address Tuesday, President Bush again admonished his country for its addiction to crude oil, and at the same time touted ethanol as an alternative energy and a substitute for gasoline. News that the president would mention ethanol sent corn futures prices sharply higher in Tuesday's trading. This is just one of the reasons that commodities are on investors' minds. Many people are able to pick up on the buzz about the sector, few are as familiar with how to profit from it. And while commodities investing is hot, neophytes can easily get their fingers burned. Let's start the discussion with why commodities make such a compelling investment now. Once you're interested, I'll explain your options for commodities investing (futures, ETFs, related stocks) and how to get started (open a futures account, etc.). Last, I'll review some common mistakes that new commodities investors make.
Due in part to the president's speech, corn futures this month have rallied to a 10 1/2-year high, and presently are trading above $4 a bushel. Just last summer, the nation's major row crop was trading well under $3 a bushel. That's an eye-catching rise. Corn is not the only raw commodity that has seen surprising price-gains the past couple of years. Wheat, crude oil, livestock and precious metals futures prices all have rallied strongly. A voracious worldwide appetite for major raw commodities has been the driving force behind the surge in commodities futures prices. In recent months, raw commodity price indices such as the Reuters/Jefferies-CRB Index have risen to highs not seen for more than 30 years. Speculator interest in raw commodities futures prices also has been a significant factor helping to drive these markets northward. A new report issued by the government's Commodity Futures Trading Commission just two weeks ago showed index funds and hedge funds (basically, large pools of speculator investment monies) have placed surprisingly heavy bets on the long side of many raw commodities futures markets. The annual returns of these funds have been very impressive the past couple of years, and new raw commodity-based funds and exchange-traded funds (ETFs) are still springing up.
It would take a move in nearby gold futures prices below major long-term technical support at $1,500 an ounce to begin to inflict serious longer-term chart damage and suggest a major market top is in place.