Module 4: Advanced Topics | Blog 4-2: Alternatives Investments by David S. Krause

In Lesson 4-2 we talked about the different types of alternative investments and we only made brief passing references to investing in natural resources. This entry talks about how to invest in natural resources and gives some possible reasons why.

Oil Well

Oil Well

Ways to investment in natural resources:

  • Direct investing: It is possible to buy some natural resources directly (like gold and silver); however, it is impractical with regards to oil, natural gas, timber, and other resources that require large storage facilities with associated costs.
  • Futures: These instruments have been in existence for 150 years and are accessible to individual investors. They allow the investor to gain exposure (via leverage) to the price exposure of natural resources. Options on the futures are also ways to obtain exposure.  These are fine investments for experienced traders, but should not be used by the novice investor.
  • Natural resource mutual funds and ETFs: These allow an investor to gain broad exposure to all or a few natural resource investments. There are many natural resource mutual funds and ETFs offered, so there are likely be several that meets an investor’s needs.
  • Common stock: While mutual funds and ETFs consist of stocks, direct investment in specific companies is another option. These can include stocks in the following type of companies:  oil and gas exploration, mining, forestry and others. Some firms are ‘pure plays’ meaning that their fortunes are highly tied to the underlying commodity and there are diversified plays (that do everything from extraction to processing to end market).
timber

Timber

Some reasons to invest in natural resources:

  • Increasing population means increased demand for resources. The United Nations estimates the world’s population to grow by 47% from 2000 to 2050, to around 9 billion.
  • Rising incomes and a growing middle class in emerging market countries creates additional demand for consumer goods and higher protein food.
  • Future demand is likely to drive prices higher as the world has a limited, finite supply of easily accessible metals, minerals, oil and gas.
  • Political instability can stress existing and near term access to the supply of natural resources.
  • Future exploration activities are likely to be more expensive as these are located in countries with less stable political environments and poor or non-existent infrastructure.

 

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