Pink Panther

How to Value a Commodity

Good point, User 397064

Rollover losses in long term commodity investing are substantial, particularly in energy. Here's a graph of rollover losses in crude:
stockcharts.com/h-sc/u...
Even worse with Natgas:
stockcharts.com/h-sc/u...

Here's a list of cost-of-carry per year of different commodity classes:
Natgas: 41%
Crude Oil: 36%
Hogs: 20%
Cotton: 19%
Heating Oil: 18%
Corn: 16%
Wheat: 15%
Cattle: 11%
Aluminum: 10%
Sugar: 10%
Coffee: 10%
Soybean Oil: 7%
Zinc: 6%
Copper: 3.5%
Nickel: 2%
Gold: 1.5%
Silver: 1%
Soybeans: -2%
(Source: Credit Suisse)

Energy has the greatest losses, followed by agriculture. The metals do not have a substantial cost-of-carry.


On Apr 29 11:48 AM User 397064 wrote:

> As an investor who is inexperienced but attracted to commodities
> investing, I appreciated your primer. It seems to me, however, that
> investing in commodity futures is more like investing in stock options
> that in the stock market. If you don't favor producer stocks, the
> alternative to filling your backyard with copper seems to be buying
> futures which require one to pick some date in the future when the
> price will be higher. Like buying stock options, if you are wrong,
> you get burned. You speak of buying and holding for years before
> selling. The cost on such a long futures contract would likely eat
> up any profit in a contango market. The ETF alternative also results
> in substantial rolling costs depending on how far out the ETF purchases
> futures contracts. An example in the well publicised underperformance
> of USO to the spot price of oil. If one could just buy, hold and
> sell the spot price!