Disadvantages of Investing in Commodities

Commodity Investment

Which are the Disadvantages of Investing in Commodities?
If inflation is defined as an increase in the cost of things, it appears that the best method to escape is to invest in products. There are numerous options. Ordinary individuals purchase metal coins or start an OMS account (impersonal metal bank account). ETFs of precious metals or raw resources, something to fake with futures, are used in slightly more complex packaging.

As a result, the triumph over inflation can only be coincidental, whereas the loss is unavoidable.

When you acquire a commodity asset, you’re essentially buying a rate of return equal to something: transactional sources, black swans, early volatility, and tax. That is, it invests profit, which is a large sum on favorable conditions.

Let’s look at an example of a well-known commodity: oil. Here’s a graph of real, inflation-adjusted oil returns in 2016 dollars over a century and a half.

Source: zmey.club/global/23-neft-s-1866-go-goda

For other commodities, the situation will be similar, if not worse.

The graphics, on the other hand, are enhancing. When you look at them, you would imagine that investing in commodities will get you a yield that is roughly equal to inflation plus some risk. It’s possible that ten years from now, you’ll discover that you earned or lost 20% by accident. Traditional portfolio theory enables investments in assets with a near-zero expected return as long as they exhibit a negative correlation with the portfolio’s main content. Promotions are usually the most often recommended content. The relationship is inverse. Is it possible, then?

Unfortunately, the gap between theory and practice is wider in practice than in theory.

There will be a difference between the chart and the pocket, and usually the difference is not in favor of the investor.

Disadvantages of Investing in Commodities

1. Commissions

Filling up your own storage units will not allow you to invest in oil or food. Even if you had such warehouses, it is still an odd way to go about things: complicated, costly, and unsafe.

This is normally accomplished through the use of foundations. They maintain a return that corresponds to the increase in the price of the commodity by using derivatives. They are not allowed to go over this limit.

At best, they can only reduce by the amount of their commission. In the worst-case scenario, some of the monies will be lost along the road. Gold has risen by about 8% this year, the fund’s charge is 2%, yet for some reason your yield is just 4%, not 6%.
Nobody knows what happened to the other 2%.

2. Spread

Let’s pretend you don’t have any money. You are drawn to gold. You go to the bank and open a .undefined In this situation, your counterparty’s income comes from the spread rather than the commission (if you wish, this can be called a commission).

The buying price differs from the sale price, as it does at a currency exchange office, and the exchanger subsists on these 2-3 percent. However, in the case of OMS, the spread can reach 10% to 12%.

I purchased gold. The pricing hasn’t changed in a year. You needed money, so you went to shut the CHI and lost 10%. What is the better way to lose – the annual commission or the spread?

If the investment is for a short term, the fund’s commission is better; Better yet, avoid it all.

3. Taxes

They are based on nominal profitability rather than real profitability. Assume that inflation is 15% per year, and you sold fund units with a 10% difference.

Because you made a profit of 10% rather than a loss of 5%, you are required to pay 13 percent personal income tax on it (taxes may differ from country to country). This tax advantage is less significant when investing in equities and bonds.

First, there is a non-negative yield, and second, there are immediate benefits to owning these instruments. In addition, there is a tax on your loss in the precious metals fund.

4. Local “skeletons in the closet”

If you opened a CHI in a bank, for example, the bank went insolvent. Your gold grams, unlike deposits, are not insured.

5. Global “skeletons in the closet”

You put money into a piece of metal you felt was precious. However, something happened in the world economy that caused the value to vanish.

For example, the rarity vanished when they finally discovered the philosopher’s stone and discovered how to produce metal from inexpensive basic materials. Or, to put it another way, demand has decreased in the new century’s industry. If the world’s complete commodity mass is invested in it, it truly reflects inflation.
However, some items go and others arrive. You’ve put money into the old system, and the new one will represent inflation.

Consider the following scenario: it’s the turn of the twentieth century, and you’ve decided to make a long-term investment. We went out and bought some firewood (there’s always a need for fuel!).
And, of course, horse harness (how could it be without transportation?) We don’t know what will happen in the future, but anything can become firewood.

6. Volatility as a psychological factor

Let’s use gold as an example, as it is the most important protective asset. As you may be aware, the value of this protective asset decreased from 1980 to 2000. Not always, but occasionally.

The fall is stronger than it appears, given the fall against the dollar and the dollar’s own slide during inflation. However, not by as much as 80-90 percent as stock markets can.

Read Also: HOW TO AVOID EMOTIONAL INVESTING 

Investing in Commodities – Conclusion

Which one is more likely to drive investors out of the asset for good: a fast loss of 80% followed by a comeback in a few years, or a steady, stubborn, twenty-year-long drop of a few percentage points every year?

In the first situation, everything happens quickly, the investor does not have time to truly suffer, and the prospect of a rebound is more costly than the 20% that may be grabbed right now. However, if you lose a piece for a long time but still own more than half of the capital…

There is something worth preserving. And there is something to run away from: it appears that such a reality is on the way, where an asset has no place.

Commodities are pernicious because they have extremely long cycles. After getting into such assets, a normal person with a normal psyche will always be disposed to go out on the prize. At the same time, he will have a definite opinion after ten years after departing forever and never returning.

And he’ll most likely enter closer to the highs. When multi-year growth gives the impression that it will last for a long period, if not indefinitely. Oil in 2007 and gold in 2011 are enticing investors. It’s been dubbed the “volatility trap.” Please consider the following scenarios for how an inflation-adjusted asset could end up being worse than the inflation-adjusted asset.

Is there anyone else who has to go?