Sunday, March 30, 2008

Alternative Investments You Should Know About – Part 2

As promised last night, I’m back with some more unconventional investment vehicles.

In my nearly 40 years (this June!) in the investment business, I have often been frustrated when I had a strong feeling that a certain commodity was overpriced or underpriced, and there just didn’t seem to be any way to take that position. I could have opened an account with a commodities broker but I was reluctant to do that. So I would either drop the idea or try to find some stock that fairly faithfully moved with the commodity. If the commodity was a metal, for example, I would buy shares in a company that mined that metal. If I liked oil, I would buy an oil company. But it is often difficult to determine which company is the “purest play” for a given commodity. And nothing is more frustrating than being right about a commodity and then “choosing the wrong horse” and having it lag for some reason.

But this frustration has now faded away. In November of 2004, StreetTracks Gold began trading under the symbol GLD, with each share representing 1/10th the value of an ounce of gold. It initially traded in the $44 range, with gold around $440. Of course, today gold is in the $900s, and GLD has gone up correspondingly, closing Friday at $91.88. And GLD was just the beginning of a flood of new exchange traded funds (ETFs) linked to commodities and currencies.

What about oil and natural gas? Last Spring, the United States Oil Fund, LP began trading under the symbol USO. USO is an ETF linked to the price performance of West Texas light, sweet intermediate crude oil. It began trading on April 12, 2006 and closed that day at an adjusted price of 67.84. Friday it closed at 84.37. There is also an equivalent natural gas partnership that trades under the symbol UNG. Neither USO or UNG have a targeted equivalent amount of oil or natural gas, but they move faithfully up and down with the commodity, and that’s all you really want. Just watch them for a while and you’ll get the feel for the price relationship.

What about currencies? Want to bet on the dollar continuing to drop? Or do you feel it’s ready to rebound? Check out CurrencyShares,, which have been created for eight major currencies against the dollar. You can simulate owning a bank deposit denominated in Euros, for example, by buying the CurrencyShares Euro Trust (FXE), which seeks to track the dollar price of 100 Euros. Therefore, FXE closed Friday at $158.50. FXE began trading in January of 2006 at around $120, and has gone up pretty steadily ever since, thanks to our weak dollar. And FXE even pays a dividend, currently around 3%. I suppose this is because it's backed by an actual interest earning bank deposit. The seven other currencies available are the Australian dollar, British pound, Canadian dollar, Japanese yen, Mexican peso, Swedish krona, and the Swiss franc.

Want to have even more fun? If you are familiar with options, many of these ETFs have options trading in them, which increases your flexibility even more. For example, recently, when oil hit $110 a barrel, I sold some March and April uncovered calls on USO, figuring it would top out somewhere up there. It had gone up five or six days in a row, as I recall. The March options have already expired worthless, and “so far, so good” on the Aprils.

There are agricultural commodity vehicles as well, but I think I’d better stop now before your head explodes. Besides, you already have enough homework to do. If you’re interested, just look up some of the above examples on Yahoo Finance, and then maybe google CurrencyShares, PowerShares, ProShares, StreetTracks, or iShares as well. I don’t know which of these are good buys right now, but I do know that if you can handle the risks and additional learning curve of this kind of unconventional investment, taking some time to familiarize yourself with these will greatly increase your investment flexibility and versatility. - Bob

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