Equities Vs. Commodities: Investment Tips for Today's Market

As a private investor, I've seen my investment portfolio out-perform the market over the last three years. The reason is simple: I have been investing in commodities instead of equities, because in today's market the scales are tipping in favor of commodities, and I believe that this trend will only strengthen.

Equities vs. Commodities

Typically when equities go up commodities fall, and vice versa. This trend holds true when the market functions normally. During a major sell-off or market rally, however, investors tend to sell or buy across the board, and equities and commodities rise or fall with the rest of the market. To understand the relevance of this oppositional rise and fall of equities and commodities during normal market function, let's look at both and see why one is out-performing the other in today's economy.

Understanding Equities

Equities represent paper assets, such as bank stocks or insurance company stocks. After the implosion of the housing bubble (which began in 2007 and is still affecting the market today) bad investments nearly brought down the entire banking system in the U.S. With the crisis, the value of equities crashed.

Current Equities Status

Government bailouts in 2008 stabilized most banks (except Lehman Brothers). To this day the Federal Reserve lends money to banks at minimal and even 0% interest, money which banks then lend to consumers at higher rates. Unlike commodities, equities are dependent on continued government assistance. But the same government is amassing unprecedented debt while practicing Quantitative Easing. This euphemism for infusing the market with more money invariably leads to inflation, which depletes the value of money and with it the value of equities.

Understanding Commodities

Unlike equities, which represent paper assets, Commodities represent physical assets, such as energy or metals. In energy you'll find such stocks as clean coal mining, for example SVM, while in metals you find precious metal mining and processing, such as ACI, which mine silver, or SLW, which process silver. The fact that commodities represent physical assets ensures that while the asset remains intact, commodity values will retain their real value.

Climate & Political Unrest vs. Equities & Commodities

Both equities and commodities are subject to changes around the world, both manmade or natural. In equities, insurance companies suffer major loses due to unexpected harsh weather resulting from global climate change (such as the unprecedented floods in Australia). Commodities, also suffer loses when such weather floods a mine or shuts down a refinery. Political unrest also affects the world economy and, for example the price of fuel.

Choosing the Right Commodities

Though commodities are out-performing equities, not all commodities are created equal. I look for stocks that give dividends, which, in my eyes, shows maturity and confidence. Furthermore, such stocks offer a higher shareholder value, as I profit directly from the company's profits without having to sell my stock. I also look for companies that have distributed risk when it comes to weather calamities or political upheaval. So, for example, I will favor a mining company with mines in several countries, over one with mines concentrated in one part of the globe. Finally, I am a long-term investor. I avoid getting caught in market trends and sell-offs.

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