commodities for dummies (isbn - 0470049286)

by Amine Bouchentouf Commodities FOR DUMmIES ‰ 01_049286 ffirs.qxp 10/26/06 2:54 PM Page iii 01_049286 ffirs.qxp 10/26/06 2:54 PM Page ii Commodities FOR DUMmIES ‰ 01_049286 ffirs.qxp 10/26/06 2:54 PM Page i 01_049286 ffirs.qxp 10/26/06 2:54 PM Page ii by Amine Bouchentouf Commodities FOR DUMmIES ‰ 01_049286 ffirs.qxp 10/26/06 2:54 PM Page iii Commodities For Dummies ® Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2007 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permit- ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http://www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: THE PUBLISHER AND THE AUTHOR MAKE NO REP- RESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS WORK AND SPECIFICALLY DISCLAIM ALL WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES OR PROMOTIONAL MATERIALS. THE ADVICE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR EVERY SITUATION. THIS WORK IS SOLD WITH THE UNDER- STANDING THAT THE PUBLISHER IS NOT ENGAGED IN RENDERING LEGAL, ACCOUNTING, OR OTHER PROFESSIONAL SERVICES. IF PROFESSIONAL ASSISTANCE IS REQUIRED, THE SERVICES OF A COM- PETENT PROFESSIONAL PERSON SHOULD BE SOUGHT. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. THE FACT THAT AN ORGANIZATION OR WEBSITE IS REFERRED TO IN THIS WORK AS A CITATION AND/OR A POTENTIAL SOURCE OF FURTHER INFORMATION DOES NOT MEAN THAT THE AUTHOR OR THE PUBLISHER ENDORSES THE INFORMA- TION THE ORGANIZATION OR WEBSITE MAY PROVIDE OR RECOMMENDATIONS IT MAY MAKE. FURTHER, READERS SHOULD BE AWARE THAT INTERNET WEBSITES LISTED IN THIS WORK MAY HAVE CHANGED OR DISAPPEARED BETWEEN WHEN THIS WORK WAS WRITTEN AND WHEN IT IS READ. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 800-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Control Number: 2006934824 ISBN-13: 978-0-470-04928-0 ISBN-10: 0-470-04928-6 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 1O/RT/RR/QW/IN 01_049286 ffirs.qxp 10/26/06 2:54 PM Page iv About the Author Amine Bouchentouf is President and Chief Executive Officer of Renaissance Investment Advisors LLC. Renaissance is an international financial advisory firm headquartered in New York City, which provides long-term strategic advice to individuals, institutions, and governments around the world. Amine is a world-renowned market commentator and analyst and has appeared in media in the United States, Great Britain, France, the United Arab Emirates, and Brazil. He is a member of the National Association of Securities Dealers and the Authors Guild and is also involved with the Council on Foreign Relations. He offers regular market intelligence briefings through the Web site www.commodities-investor.com. Amine holds a degree in Economics from Middlebury College. In his spare time he enjoys playing golf, traveling, and socializing with friends. This is his third book. 01_049286 ffirs.qxp 10/26/06 2:54 PM Page v 01_049286 ffirs.qxp 10/26/06 2:54 PM Page vi Dedication This book is dedicated to my most steadfast supporters — my family. You have always been there for me when I needed you and have always supported me in every endeavor I decide to undertake. I would not have been able to accomplish half the things I’ve done without your tremendous support, and for that I am deeply grateful. Author’s Acknowledgments I was completely thrilled when Wiley approached me about working on a second book for the For Dummies series. I knew right off the bat that this was going to be a very ambitious project that would require a lot of focus. The challenges in writing a book of this scope were numerous and enormous. First, both Wiley and I sought to create the most comprehensive guide on the subject available to investors. I believe we succeeded because Commodities For Dummies covers over 30 commodities; besides the Commodity Research Bureau Yearbook, no other introductory book includes coverage of so many commodities. Second, Wiley and I also wanted to bring this book to market sooner rather than later. Working pretty much around the clock, seven days a week, I was able to hand in the manuscript in four months (five months total when editing and reviewing are factored in). Every author who takes on a project of this size realizes very quickly that the undertaking cannot possibly be done alone. Despite romantic clichés about writers locked up in attics writing feverishly and not communicating with the outside world for months on end, one quickly realizes that writing a book of this kind is really a team sport. Fortunately, I had the pleasure of working with a wonderful team of dedicated professionals, both in publishing and in finance. First, I’d like to acknowledge the first-rate editorial team at Wiley for their input and assistance through every stage of this process. Every writer hopes for nothing more than to have a team of editors who will support their gen- eral creative vision, and I was extremely fortunate to have been able to follow through on my vision for the book — from the drafting of the Table of Contents down to the inclusion of technical charts and figures — with the guidance of a knowledgeable group of editors. Specifically, I’d like to thank Laura Peterson Nussbaum, my project editor, for providing valuable insight through every step of the way. I’d also like to express thanks to Stacy Kennedy for helping launch the project early on and for her continuous input throughout the writing period. And I would also like to show my gratitude to the graphics department for helping me express my ideas and illustrate my points with the help of charts, graphs, and other helpful visuals. Finally, I would like to thank Noel Jameson who served as technical editor. 01_049286 ffirs.qxp 10/26/06 2:54 PM Page vii Because the financial markets in general, and the commodities markets in particular, are so broad and deep, getting insight on all the different aspects of the markets is absolutely critical. I was very fortunate that I could turn to some of the sharpest minds in finance for their insight on the markets. I’d like to thank Dr. Scott Pardee at Middlebury College for providing me with cutting- edge analysis on the cyclicality of the markets. I’d also like to acknowledge the contributions of Ray Strong at Goldman Sachs regarding all aspects of the energy markets. Thanks to Karen Treanton at the International Energy Agency in Paris for providing me with all the vital statistical information on the energy industry. I would like to express my appreciation to John D. Phillips and Neil McMahon at Alliance Bernstein for their world-class research. Kevin Rich at Deutsche Bank shared with me his knowledge of managed funds, and thanks to everyone at the NYMEX for their support — Jim Newsome, Madeline Boyd, Sam Glasser, Linda Rapacki, and Jenifer Semenza. Additional thanks goes to Frank Ahmed at Bear Stearns and Richard Adler for their general guidance. I also need to acknowledge the contributions of Elisa Castro, Heather Balke, and, of course, my agent Mark Sullivan. Finally, I’d like to express my gratitude to my family, whose support was instrumental throughout this process. 01_049286 ffirs.qxp 10/26/06 2:54 PM Page viii [...]... someone with minimal trading experience, and you’re interested in a broad-based investment approach that includes commodities and other assets 3 4 Commodities For Dummies ߜ You understand the attractiveness of commodities and want a comprehensive and easy-to-use guide to help you get started ߜ You’re skeptical about the benefits of commodities but want to read about them anyway Please do, I’m confident... skipping around in the chapters on particular commodities 7 8 Commodities For Dummies Part I Commodities: Just the Facts T In this part he chapters in this part give you everything you wanted to know about commodities I introduce the commodities markets and go through some of the individual commodities and how they interact with each other I also look at how commodities as an asset class compares to... separate fact from fiction from outright fantasy The aim of Commodities For Dummies is to help you figure out what commodities are all about and, more importantly, to help you develop an intelligent investment strategy to profit in this market About This Book My aim in writing Commodities For Dummies is to offer you a comprehensive guide to the commodities markets and show you a number of investment strategies... and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Joyce Pepple, Acquisitions Director, Consumer Dummies Kristin A Cocks, Product Development Director, Consumer Dummies Michael Spring, Vice President and Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General... 32 xiv Commodities For Dummies It’s All about Me! Why Commodities Are Unique .34 Inelasticity .34 Is it safe in here? Commodities as a safe haven .36 Hedge-hogging galore! Commodities as a hedge against inflation .36 Could you hurry up, please! Bringing new sources online takes time 38 Sell in May and go away? Definitely nay! 38 Time to Get Down to Business: Commodities. .. invest in this asset class I expect commodities to maintain this solid performance in the medium to long term, for reasons I outline throughout the book As commodities have been generating more interest, there’s a large demand for a product to help average investors get a grip on the market fundamentals Commodities as an asset class have been plagued by a lot of misinformation, and it’s sometimes difficult... moving to the investing mainstream The reason? Good performance Investors like to reward good performance, and commodities have performed very well lately For instance, while I was writing this book, gold prices reached an alltime high; copper prices hit a 25-year high; oil companies, led by Exxon Mobil, posted some of the best quarterly and yearly performances in the history of corporate America; and... Your Engines! An Overview of Commodities In This Chapter ᮣ Figuring out why you should invest in commodities ᮣ Defining the commodities markets ᮣ Determining the best ways to trade commodities ᮣ Identifying the major commodities T he commodities markets are broad and deep, presenting both challenges and opportunities Investors are often overwhelmed simply by the number of commodities that are out there:... London Gold Fix 323 Non-farm Payrolls .323 Purchasing Managers Index 324 Reuters/Jefferies CRB Index .324 US Dollar 324 WTI Crude Oil .324 xix xx Commodities For Dummies Chapter 24: Ten or So Resources You Can’t Do Without 327 The Wall Street Journal .327 Bloomberg 328 Commodities- Investor.com 328 Nightly... incorporate commodities in your financial life Parts III, IV, and V then cover each specific commodity sub-asset class: energy, metals, and agricultural products Finally, the last two parts of the book include the legendary For Dummies Part of Tens chapters along with a useful appendix to help you look up the technical terms discussed throughout the book Part I: Commodities: Just the Facts The first part of Commodities . available in electronic books. Library of Congress Control Number: 2006934824 ISBN-13: 97 8-0 -4 7 0-0 492 8-0 ISBN-10: 0-4 7 0-0 492 8-6 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 1O/RT/RR/QW/IN 01_049286. READ. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 80 0-7 6 2-2 974, outside the U.S. at 31 7-5 7 2-3 993, or fax 31 7-5 7 2-4 002. For. 46256, 31 7-5 7 2-3 447, fax 31 7-5 7 2-4 355, or online at http://www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest