Jared Cummans: Any commodity investor worth their salt will tell you that investing in these products requires an understanding of the global economy, not just that of the US. In fact, a number of the world’s most popular commodities, like gold and copper, are mainly produced abroad. Though the U.S. holds its own when it comes to a number of agriculture products among others, the majority of commodities are derived elsewhere. As investors begin to dig deeper into their favorite commodities, they may find that the underlying product is most often developed or produced in an emerging or even frontier market, which can carry some risks [see also 50 Ways To Invest In Gold].
Emerging markets are those that are rapidly developing, but still do not have the size and strength of the developed nations of the world. Frontier markets are even less developed and are considered the riskiest from an investment standpoint. Both economies are prone to high risks but potentially high rewards. But with a number of emerging and frontier markets dominating the commodity space, the political risks associated with certain futures and funds can be severe. Below, we outline three commodities that are extremely vulnerable to political risk that investors may want to keep a close eye on [see also Three Legendary Commodity Investors].
Cocoa (NYSEARCA:NIB) is a member of the softs family and is one of the more popular agricultural commodities as far as trading is concerned. Perhaps one of the reasons for its popularity is its volatility; cocoa is mainly produced in a frontier market, the Ivory Coast. The Ivory Coast is by far the global leader when it comes to cocoa, as it nearly doubles the output of the next highest country. But when it comes to stability, the Ivory Coast has proven itself to be one of the most volatile nations in the world. Within the last decade alone, the country has been home to two civil wars with the most recent one ending earlier this year [see also Ultimate Guide To Cocoa Investing].
With all of the turmoil in the aforementioned region, cocoa is at the mercy of the stability, or lack thereof, of the Ivory Coast. Investors should also note that Africa as a whole accounts for more than 70% of the world’s cocoa output, putting a laundry list of other unstable regions together to make for a risky commodity investment.
Nuclear (NYSEARCA:PKN) has come under fire in 2011 after Japan’s Fukushima plant endured a tragedy which resulted in the leaking of nuclear waste into the surrounding environment. The following weeks led to many analysts and experts questioning the safety and security of these plants. The questions and concerns led to actions by some of the world’s biggest nuclear players. The German government, long known for its adoption of alternative energies, announced that it would phase out nuclear power by 2022. This was followed by the major German conglomerate Siemens, announcing that it will no longer be building nuclear facilities anywhere in the world.
With some of the world’s most powerful countries questioning the safety of these plants, nuclear may be headed for a rough patch. Though scientists insist that newer facilities are perfectly safe and are still viable energy options, many are not willing to endure the risks that a plant of this nature brings. Whether the plants are safe or not, politicians and leaders everywhere may follow in Germany’s footsteps depending on how their population views the renewable resource [see also MLPs: CEFs, ETPs, or Mutual Funds?].
In recent years, silver (NYSEARCA:SLV) has surged as an investment, as traders have seen its use as a hedging tool as well as a safe haven metal. But while most investors stock up on the precious metal to protect them from market woes, not everyone is fully educated as to where silver comes from, or the fact that it carries moderate political risk. The South American economy, Peru, is one of the largest players in the silver space. In fact, the country accounted for more than 18% of 2010 production and is home to over 20% of global proven reserves of silver. Peru has long been a volatile emerging market, as its political stability often falters, causing inconsistency in its economy [see also 25 Ways To Invest In Silver].
Investors should note that silver is a relatively popular metal and is also produced in a number of developed markets, so it does not carry the same risks that the previous two commodities exhibit. Still, it is important for silver traders to understand where the metal comes from, as a close eye on the Peruvian economy could lead to some profitable trades in the precious metal [see also Ultimate Guide To Silver Investing].
Written By Jared Cummans From CommodityHQ Disclosure: No positions at time of writing.
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