By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
We’ve seen gold and oil prices skyrocketing these past couple of months. We’ve seen food prices spark major uprisings in the Middle East, and new governments are taking shape even as commodities like corn are starting to trade higher again.
The swings in commodity prices may put some investors off. Gold is near all-time highs, but has climbed $35 in the past five days.
I’m sure many people are questioning how much higher commodities can get.
We’ve talked about the fundamentals behind a number of commodities, like agricultural commodities, precious metals and oil. We tend to be long-term bulls on commodities in general, but we understand that such high prices could make people wary of jumping in with a large chunk of money.
Well, I’d like to share with you the safest way to play commodities.
It’s not with options or ETFs, or even commodity-based companies. It’s with a CD… and it’s got commodities covered.
It’s EverBank’s MarketSafe® Diversified Commodities CD.
Here’s the breakdown: This CD is equally weighted in WTI Crude Oil, Gold, Silver, Platinum, Soybeans, Corn, Sugar, Copper, Nickel and Lean Hogs. That means each of these commodities makes up 10% of the portfolio.
The term for the CD is five years, and the minimum amount you can invest is $1,500.
But here’s the best part, and it’s why this is the safest way to play commodities. As a MarketSafe® CD, 100% of your principal is protected.
That’s not a typo. If, at the end of five years, commodities have not generated a return, you get 100% of your deposited principal back.
Would you rather buy 30 shares of a gold mining company like Barrick Gold Corp. (ABX:NYSE), and risk losing money? Or would you rather park $1,500 in a safe CD with zero downside risk?
I think a lot of people would be more interested in 100% safety.
That’s why EverBank has extended its deadline for funding this MarketSafe® Diversified Commodities CD to May 5, 2011.
(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
Now, I know some people would rather be able to get in and get out of an investment whenever they want, and that is one of the drawbacks of a CD, particularly with a term of five years. I do think, however, that the low minimum investment does make this CD more attractive.
Of course, you can put as much as you want into this CD, and you’re FDIC insured for up to $250,000.
The other possible drawback is that your upside is limited.
From EverBank’s MarketSafe® Diversified Commodities CD Fact Sheet:
Maximum Market Upside Payment: The sum of the average returns for years 1-5, based on the Spot Price as of each Pricing Date relative to the Spot Price on the Initial Value Date, subject to a 10% cap and -20% floor for each commodity.
So, let’s decode what this actually means. Each of the 10 commodities can grow as much as 10%. If gold, for example, grows 15%, only 10% is counted toward your return.
That means you could be leaving some money on the table if you chose to invest in this CD and commodities really take off.
On the other hand, an annual loss is halted at 20%. So if oil decides to drop big time, like it did just during the global financial crisis, your loss for that year could only be 20%. But remember, your principal is 100% protected, so any loss only impedes potential gains, not your initial investment capital.
Now, let’s talk about what pricing date, spot price and initial value date mean.
The initial value date for this CD is May 12, 2011. This is when EverBank first starts tracking the spot price of each of the 10 commodities. Each year for the full five years of the CD’s term, EverBank will use May 12 as its pricing date.
So, for example, if crude oil is trading at $100 a barrel on May 12, 2011 (and EverBank uses the closing price as the day’s spot price) and $109 a barrel on May 12, 2012, the CD locks in a 9% gain for the first year.
Then the calculation starts over with $109 a barrel as the “initial” value for the second year of the CD.
The next thing you need to know is that the averaged gains from all 10 commodities are added together each year.
That means on May 12, 2012, EverBank adds the gains (or losses) from each commodity and divides by 10 for the average gain for the year. It does this for each of the five years of the CD’s term, and gives the investor a cumulative return when the CD matures on May 17, 2016.
This again means your upside is limited. Because EverBank takes an average of all 10 commodities for the annual “return,” and each commodity is capped at a 10% gain, each year’s return is limited to a 10% gain… for a total possible return of 50%.
Now, that’s not a bad return in anybody’s book, but you’d have to wait five years to see it.
In my opinion, because of the guaranteed principal protection, this is worth a hard look for anyone wanting to diversify their portfolio into commodities. Heck, you can always augment this CD with investments in commodity-based ETFs, companies and even futures.
In years when oil is booming you can look to oil producers for an added gain. Gold screeching higher? Grab a mining company or two.
But always rest assured that at least some of the money you’ve invested in commodities through EverBank’s MarketSafe® Diversified Commodities CD is 100% principal protected.
You can learn more about this CD here.
*Note: We firmly stand behind EverBank and their products and think they are a solid way to grow your wealth. But you should know that we also have a business relationship with the company and receive a financial benefit from the sales of this product.
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About the Author
Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.
As Senior Research Director, global correspondent and managing editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
