Natural resource investment

The reasons for investing in natural resources have always been compelling. Whether it is wood, coal or gold, natural resources are at the core of production. The screen you use to read this article is just a collection of processed and reprocessed natural resources. As the world’s population demands more and more of these resources, the pool of natural resources that can be invested is also growing. In this article, we will understand why and how you should consider investing in natural resources.

Key points

  • Natural resources such as wood, coal or gold are the basis of all production.
  • Market participants can invest in natural resources through anything mined or collected in primitive form.
  • Investment in natural resources is attractive due to increased income, global infrastructure repairs, political purchases, and stores of value (especially metals).
  • Investment methods include direct purchases, futures and options trading, the purchase of mutual funds or exchange-traded funds, and the purchase of individual stocks.

Natural resource investment scope

The scope of investment in natural resources is very wide, covering anything that is mined or collected in primitive form. Starting from its original form, natural resources may undergo further processing—for example, cutting a tree into 4×4, 2×10, 2×4, etc.—or just be cleaned, packaged, and sold (a bucket of oil or a bottle of water). Natural resource investment overlaps with more specialized types of investment, including oil and gas investment, precious metal investment, mineral and (base) metal investment, etc. If it can be mined, cut or collected from above or below the earth’s crust, natural resource investors are looking for a way to buy.

However, there is a caveat. Agriculture-such as cattle, corn, cotton, etc.-is often confused with natural resources because many natural resources and agricultural products are traded in the same way. For the purposes of this article, agriculture is not categorized as natural resources, although its output (cereals, corn, etc.) is traded in the same way as other natural resources and faces similar economic forces. The reason is that many agricultural products are less durable than other products in this group, making their value storage problematic.

Some well-known natural resources ETFs include FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR), SPDR S&P Global Natural Resources ETF (GNR), and SPDR S&P North American Natural Resources ETF (NANR).

Reasons for investing in natural resources

There are many reasons why natural resources make attractive investments now and in the future:

  • increasing income: As the incomes of developing countries increase, the demand for precious metals, construction materials and other natural resources also tends to increase. Although supply shocks are still a potential risk for many resources such as oil, increased demand usually leads to higher prices;
  • Global infrastructure and maintenance: Developing countries have a huge demand for gravel, wood, steel and other materials needed to build roads and other public works. This building boom is driven by population growth and the process of urbanization. Similarly, most of the infrastructure in developed countries needs to be updated regularly. The longer it takes to repair and update, the greater the final expenditure;
  • Political buying: Many countries have begun to purchase natural resources to ensure the continuous supply of key raw materials. Such purchases sometimes take the form of political agreements, sometimes in the form of direct open market orders or foreign acquisitions, making the government another driver of demand;
  • Store of value: Many natural resources can be used as value stores, especially metals. When inflation threatens investors, these resources become more attractive.

There is also a view that the correlation between natural resources and the financial sector is low.This is largely correct, because many companies continue to hold consumer natural resource investments during the financial downturn in order to prepare for a rebound. However, as more and more natural resource activities are driven by investment and speculation, this lower correlation may turn into a higher correlation.

Investment options for natural resource investors

So, you have heard the reason and want to know where to start. Fortunately, there are now a wider range of investment options than ever before.

  • Direct investment: Investors can always purchase resources directly. This method is suitable for small investments in precious metals, but when it comes to wood, natural gas, and other resources that require large storage facilities, it quickly becomes impractical, and this brings associated costs;
  • Futures and options: The contract-based resource trading method allows investors to use their U.S. dollars in a shorter period of time instead of storing physical resources for months. For experienced traders, these are good investments, but futures and options may confuse everyone except these experts;
  • Exchange Traded Fund: Natural resources ETFs are just another example of how ETFs can help investors gain broad market exposure through small investments. Natural resource ETFs all contain different styles that they consider essential, so finding the right ETF will take some time. The good news is that there may be one that suits your exact needs waiting for you to find it;
  • stock: Of course, ETFs are made up of stocks. Investors can dispense with middlemen and directly purchase shares in these natural resource companies. These include mining stocks, forestry stocks, and oil exploration stocks. Generally speaking, there are two types of natural resource companies: professional and junior. Professionally provide diversified games from extraction to processing to market sales, and may bring dividends. Juniors is a pure game and very sensitive to price changes. They usually do not provide dividends, but if the value of the natural resources they control increases, they can provide generous returns.

Bottom line

Investment in natural resources is expanding. In the 1970s or even the 1990s, you could not easily invest in water. You have to figure out which companies get a lot of revenue from the water and then buy. Now you can use Invesco Water Resources (PHO) and other ETFs to reduce these steps. In other areas, this change only further increases options. You can still buy stocks in coal mining companies or coal ETFs, trade coal futures, or even buy a batch of coal for storage; there are almost no restrictions on natural resource investment. With the gradual increase in investment choices and demand for these resources, this is a very interesting area for investors.

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