What are the different ways to invest in commodities?

Question

Please provide any method for investing in commodities.

Please identify the advantages/disadvantages for each method.

Please identify if a particular investing method only applies to certain commodities (e.g. possessing physical gold and silver is practical but not as practical for other commodities like oil, corn, and wheat).

Answer 1

Here's a start at a high level:

• Actual ownership.
  
  • Pros: You actually take delivery and possess the item.
  • Cons: Transaction costs are higher, there may not be a liquid market, you need cash and you need to secure the stuff somewhere.
• Ownership through a trust, Mutual Fund or ETF. (Example: GLD, CEF)
  
  • Pros: You don't need to take delivery, transaction costs are lower, you can buy on margin.
  • Cons: It is a "paper" product, many of these funds are ETNs, which carry credit risks, and you are subject to risk of the brokerage or trust/ETF operator failing or otherwise not meeting obligations.
• Indirect exposure via equities. (ie. Buy an oil/gold company)
  • Pros: You get exposure to equity price changes without owning the commodity. You yield a premium from well-managed companies, and often get dividends.
  • Cons: Conversely, you can lose money due to a companies management being poor, irrespective of commodity prices. (ie. BP) You can offset that risk with ETFs or mutual funds (ie. VMW)
• Futures and options.
  
  • Pros: You can make alot of money and use leverage to maximize your investment.
  • Cons: You are forced to look at the commodity's price over relatively short periods of time. You can easily lose everything and more. These markets are volatile.

I have a few friends who have made a killing on GLD, and write options to make money off of the investment without incurring the capital gains penalties for selling. That's a little out of my comfort zone though.