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What do the Best Investors Think About Commodities Markets?

Are oil and gold ever an acceptable investment?

Commodities themselves will only hurt you from making any reasonable gains on the market. Earlier this year, we saw crude oil futures contracts reach severely negative values. They were paying people to take the contracts off their hands.

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Crude oil contracts (continuous). Source: Investing.com

The reason why this occurred on April 20th is because the 20th (sometimes 21st) of each month is what’s known as the settlement date of that month. This means that the paper contracts people are trading for what they perceive is the value of oil is going to be actualized. Another way you can think of this is moving from an unrealized valuation of oil to a realized value.

On that day, in the middle of a global pandemic, nobody wanted to take order of oil barrels. This phenomenon is sparked by the panic in the shops who speculate on these contracts with no intention of ever taking delivery of the oil. When it came closer to the settlement date, that month’s oil contracts simply crashed, meaning that people would get paid to take delivery of oil (after transportation and storage and all other associated costs).

Does this mean that oil was a good thing to “invest” in or “bet” on?

That’s for you to decide. A popular ETF, OILK, moved up around 40% after that trough above:

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Chart for OILK, a popular crude oil ETF. Source: stockcharts.com

Does this tell us it’s a worthwhile venture? Probably not.

Will crude oil continue to go up and find its value at a higher point in the future? You could easily make the case for it.

There are many things that will continue to increase in value that are not worthwhile ventures as a point in speculation or investment. Oil is one of those things.

If you had a few extra dollars and you wanted to catch some of the recovery of the markets, you could have purchased futures contracts for crude oil that was oscillating between $10 and $15 a barrel before settlement dates in the months following May.

Overall, there are better ways to capture the recovery and strength of the markets without ever having to look at commodities.

Gold “gets dug out of the ground in Africa… Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” — Warren Buffet

People attribute Buffet’s $565 million purchase into Barrick Gold as a testament to the fact that he has changed his mind on that view. There is a difference between owning stock and owning a commodity. There is also a difference between $565 million and tens of billions. Buffet has over $150 billion in cash right now.

Commodities are a strange area. You can certainly make money investing in various things, but it’s overall designed to be a stable medium on which to exchange for the physical object. Oil a commodity that eventually powers and lubricates internal combustion motors. If oils price is jumping around because you are speculating it is a great investment, the refineries who need that raw crude oil will hedge against that massive speculation.

They’re not companies. They’re not supposed to grow. At their core, they’re designed to be anti-speculation but they exist in an arena where speculators are twisting and pulling in a myriad of directions.

Written by

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries: Moumj@berkeley.edu

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