Unveiling the Forgotten Importance of Raw Materials in our Finances: Insights from Bolivia

Whoever, like the author, spends his holidays in Bolivia and dashes over dusty roads from the tropical plains to the Andes, cannot avoid one topic: raw materials!

Coffee and cocoa thrive here on lush jungle slopes. Lithium is stored under the world’s largest salt lake, the Salar de Uyuni. And the “rich mountain”, the Cerro Rico in Potosí, sadly bears witness to how the Spanish conquerors once filled their treasury with silver. In its heyday, Potosí was considered the richest and largest city in the world.

Bolivia is a country of immense resources – wrote Jim Rogers as he chugged around the globe in a custom-built Mercedes.

Rogers had made so much money from his Quantum fund that he retired at age 37. Since then, he has earned a reputation as a commodities guru. “Commodities are almost the only asset class that is still cheaply valued,” preaches the “Indiana Jones of finance” these days.

Without raw materials such as coffee, oil and metal, our everyday life comes to a standstill. Commodities are the oldest asset class – and the one we tend to forget. Also because the market for “commodities”, as they are called raw materials in stock market parlance, is complex.

At times, commodities generate similarly attractive returns as equities – but are often subject to high fluctuations. Because every raw material is extracted and used differently, prices develop differently. In any case, commodities are suitable for diversifying finances and protect against inflation.

A physical purchase would incur hefty storage costs. The majority of commodities trading therefore takes place via commodities exchanges. The market participants do not negotiate current prices, but rather future ones.

When people talk about crude oil and wheat prices, they usually mean exchange-traded commodity futures prices. Futures are standardized forward transactions.

Investors rarely hold their futures to maturity. They usually sell them beforehand and stock up on new ones (“rolls”). If the prices of financial contracts and those of physical commodities diverge significantly, this indicates a bubble.

Precious metals are in a class of their own within the family of commodities. A physical purchase can be worthwhile for these. “Pushing for gold, everything depends on gold!” wrote Johann Wolfgang von Goethe.

But all that glitters is not gold. Silver coins have been minted for almost 3000 years.

At the time, it was not known that silver surpasses every other metal in terms of thermal and electrical conductivity. Because of these properties, silver is in great demand in electromobility, telecommunications and photovoltaics.

Ascending trend. Silver is currently over 80 times cheaper than gold. In historical comparison, “the little brother of gold” is cheap!

What alternatives to direct purchases and futures are there for investing in commodities? Stocks of resource companies are suitable for investors who are also examining the company’s business model. Almost any commodity strategy can be pursued with listed commodity funds (commodity ETF) and structured products (certificates) on commodities.

If you want to invest personally like the commodity adventurer, you can even purchase an ETF on the Rogers International Commodity Index. Or go on trips like this one.

***

Stephan Lehmann-Maldonado combines two of his passions: a fascination with business and clear communication. He was already writing for business media while he was studying finance at the University of Zurich.

He later deepened his knowledge in banking practice and teaching apprentices. Today he runs a small communications agency.