You invest in commodities because you’ve realized that it’s better to have your money working for you than to have it sit in a bank account earning so little interest that you end up losing money when you factor in inflation. Most people end up working for their money all their lives, and they get stuck in a vicious cycle where they become servants to money.
If you’re caught in this vicious cycle, you want your relationship with money to do a 180-degree reversal: Instead of working hard for your money, you need to have your money work hard for you! Investing allows you to build and, more important, maintain your wealth.
Building wealth isn’t easy, but with a little discipline and self-control, it can be a fun and rewarding process. If you’re new to investing in general, check out Eric Tyson’s Personal Finance For Dummies and Investing For Dummies (Wiley) for foundational information and guidance.
Often the accumulation phase isn’t the biggest challenge to building wealth; many times being able to preserve wealth is more difficult. Keep in mind these factors that can negatively impact your bottom line:
Inflation: Inflation, an increase in prices or the money supply, which can result in a quick deterioration of value, is one of the most detrimental forces you face as an investor. Inflation keeps some of the brightest minds up at night; among them is the Chairman of the Federal Reserve, whose main priority is making sure that the economy doesn’t grow so fast that it creates bad inflation.
When inflation gets out of control, the currency literally isn’t worth the paper it’s printed on. This state, known as hyperinflation, occurred in Weimar Germany in the 1920s. At its worst, people placed paper money in their stoves to heat themselves during the winter because the money burned longer than wood. Conveniently, one way to protect yourself from inflation is to invest in commodities such as gold and silver.
Business cycles: In the world of investing, nothing ever goes up in a straight line. Minor turbulence always arises along the way, and most investments usually experience some drops before they reach new highs — that is, if they ever reach new highs! The economy moves in the same way, alternating between expansions and recessions.
Certain assets that perform well during expansions (such as stocks) don’t do so well during recessions. Alternatively, assets such as commodities do fairly well during late expansionary and early recessionary phases of the business cycle.
As an investor interested in preserving and growing your capital base, you need to be able to identify and invest in assets that are going to perform and generate returns, regardless of the current business cycle.
You can minimize these risks and others, such as risks posed by fraud, the markets, and geopolitics, with some due diligence and a few wise decisions.
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Source:http://www.dummies.com/how-to/content/build-and-preserve-wealth-in-the-commodities-marke.html
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