How/where does one invest in natural resources, like gold, wood, and so on?
Strictly speaking, you don’t.
You can invest in companies or assets that produce (or are capable of producing) such commodities, because such an investment can be expected to have a return and produce a profit. You can invest in the stocks of gold miners, or timber companies, and so on, because such companies need investment capital in order to purchase and maintain the equipment to harvest those commodities, and that’s the classical definition of an investment: providing working capital to an enterprise in the expectation that said enterprise will be able to produce a return of capital on that investment that exceeds the original investment.
You might think the commodities market is a place where you can “invest” in commodities. Let’s look at why that’s incorrect:
- a commodity is something that can be purchased for a known price because it costs a certain amount to make. That price is fairly well understood, although it is not a fixed amount in any particular place and time due to various factors of “luck”- wheat might have a better or worse yield from year to year, trees may be harder or easier to harvest and ship to their final destination more or less easily, etc. But strictly speaking, if you are “investing” in a futures contract, you aren’t “investing”, you are speculating that you know something about the ease or disadvantage that particular year might provide.
- You can’t invest in commodities- you can either temporarily hold a contract to deliver a commodity, or you can accept delivery of that commodity, and if you don’t continually turn over the contracts written they will expire worthless and you will lose all your capital. You can invest in a company which engages in the business of holding commodities, such as a commodity ETF (yes, that’s right, an ETF is actually a company which holds investments), but you are paying a fee to utilize that company’s know-how to buy and sell commodities and the futures and derivatives contracts that they are based on.
- If you buy and hold a commodity, there’s a fixed cost associated with the storage of that commodity. With gold, probably the easiest of the commodities, you still have to worry about keeping that physical bar secure from theft, and if you invest in (for example) an ETF that holds “physical gold”, you are going to pay a management fee every year for something that (basically) never changes in inflation-adjusted price. Therefore, you’re not investing at that point- you are “preserving capital”, typically at a loss relative to inflation. Since you aren’t receiving a return of capital in excess of original investment, it’s not an investment.
- Most commodities are perishable. Wood, oil, wheat, orange juice, even water: you can’t hold such a thing the way you might hold a bar of gold and expect them to retain their value. Liquids evaporate. Wood and wheat rot. Orange juice spoils. For these, you can’t even attempt to engage in long term speculation (which might marginally be considered to be “investment”, of a form) that “this year’s” orange juice is going to some how be “worth more” next year than next year’s orange juice, because you either consume and use it, or let it rot worthless. You can attempt, in the short run, to control or corner the market, or purchase contracts in advance if you happen to know (or care to speculate) that this year’s orange juice might fetch a higher price than normal, but again, that’s not an investment, that’s speculation, or more properly, gambling.
As such, you don’t “invest” in natural resources: you either invest in companies that utilize or produce natural resources, or who manage the buying and selling of those resources. Any direct purchase of a natural resource is either speculation or arbitrage- gathering a rent or fee or gambled winning associated with holding that commodity for a short duration. At best, you can hope to hold that commodity on the assumption that said commodity will be more scarce and therefore fetch a higher price at market, but unless you control significant quantities, you cannot reasonably control the risk associated with such a gamble. At that point, you aren’t investing, you are engaging in a form of “disaster preparedness”- hoping to be one of the few people who do well when the larger quantity of the population isn’t prepared.
There’s a view of investment that suggests that true investment isn’t a “zero-sum” game- that a genuine investment enables the production or creation of new stores of value that wouldn’t exist without said investment. There’s tons of examples- investing in a company like “Bell Telephone” created a new industry of communication that hadn’t existed before and has created all sorts of new innovations as it matured- faxes, the internet, etc., each in turn enabling new creations of value purely out of thin air.
It would be pointless, for example, to attempt to invest in a commodity called “telephone minutes” or a commodity called “transistors” because there’s lots of evidence that the overall trend in price on both of those things has been asymptotically approaching zero for decades. This is the paradox of investment in commodities- in the long run, the price on “things” tends to approach zero- either because they decay or become less costly as technology decreases the price of said “things”. In most cases, it’s better to invest in “picks and axes”- rather than investing in a thing, which is transient in nature and is constantly at risk of being stolen, you invest in the process of gathering and making things, and the intelligence of people or organizations.
Even gold, whose price changes very little on an inflation adjusted basis, has gotten significantly cheaper due to something called “productivity”. As humans become more productive in all regards, the relative price of any commodity becomes a smaller percentage of the overall budget of available capital. At the turn of the 20th century, the average 1st world person person spent upwards of 75% (probably closer to 90%) of their household budget on food. As the 20th century progressed, that same average person spends less than 10% (and many closer to 5%) of their overall household budget on food. (see, for example, the data in A Revolution Down on the Farm: The Transformation of American Agriculture since 1929 eBook: Paul K. Conkin) If you had invested in the hypothetical commodity “calorie of food” (even disregarding spoiling), you would have lost almost all your money, because relative to the value of money produced from a day’s labor, the price of a calorie has plummeted over the course of the last 100–200 years. If you look at the price of gold relative to the overall capital able to be brought to bear by, say, the entire economy of the US (but also against nearly every economy of the world) over the last few decades, you would see that the true “price” of an ounce of gold has actually plummeted in value. At one point, both gold wedding rings and diamonds might have been an extravagance not able to be afforded by most people, and yet, today, I’d be surprised if there isn’t even a significant portion of otherwise poor individuals who have at least a few pieces of metal jewelry, a watch or a cellphone, a diamond ring for their spouse, etc., etc., that 50 years ago would have been considered a precious valuable, kept in a safe and only worn on special occasions.
answer originally published on Quora: https://www.quora.com/How-where-does-one-invest-in-natural-resources-like-gold-wood-and-so-on/answer/Matt-Harbowy?srid=hoC6
matt harbowy is a scientist, activist, and data management expert. He is one of the founders of the non-profit Counter Culture Labs, working to bring fairness and egalitarian ideals to people interested in learning about science and biotechnology. He is also a top writer on the question and answer site, Quora.