The reasons for investing in natural resources have always been strong. Whether it's lumber, coal or gold, natural resources are at the core of production. The screen you are using to read this article is just a collection of natural resources that have been processed and reprocessed. The pool of investable natural resources is growing as the world population requires more and more of these resources. In this article, we'll look at why you might want to consider natural resource investing and how you can go about it.

SEE: Mine For Profits With Natural Resource Sector Funds

The Scope of Natural Resource Investing
Natural resource investing has a wide scope that covers anything that is mined or collected in raw form. From its raw form, the natural resources may go through further processing - cutting a tree into 4x4s, 2x10s, 2x4s and so on - or simply cleaned up, packaged and sold (a barrel of oil or a bottle of water). So, natural resource investing overlaps with more specialized types of investing, including oil and gas investing, precious metals investing, minerals and (base) metals investing and so on. If it is mined, cut or collected from above or beneath the earth's crust, then natural resource investors look for a way to buy in.

One caveat, though. Agriculture - cows, corn, cotton and so on - is often lumped in with natural resources because many natural resources and agricultural commodities are traded through the same methods. For the purposes of this article, agriculture won't be grouped with natural resources even though its outputs (grain, corn, etc) trade just like other natural resources and face similar economic forces. The reasoning is that many agricultural products are less durable than the rest of the group, making them questionable stores of value.

Reasons to Invest in Natural Resources
There are a number of reasons why natural resources make attractive investments now and in the future:

  • Rising incomes: as incomes increase in developing countries, the demand for precious metals, building materials and other natural resources tends to increase as well. Although a supply shock is still a potential risk with many resources, such as oil, rising demand generally leads to rising prices.
  • Global infrastructure and repair: developing countries have a huge appetite for gravel, lumber, steel and other materials needed to build roads and other public works. This building spree is being prompted by population growth and increasing urbanization. Similarly, much of the infrastructure in developed nations requires updating on a regular basis - and the more decades that pass before repairs and updates are made, the larger the eventual spend will be.

SEE: Build Your Portfolio With Infrastructure Investments

  • Political buying: a number of nations have begun buying up natural resources to ensure a consistent supply of important raw materials. This buying sometimes takes the form of political agreements and sometimes outright open market orders or foreign acquisitions, making governments another driver of demand.
  • Store of value: many natural resources act as a store of value, particularly the metals. These resources become more attractive when inflation threatens investors.

There is also an argument that natural resources have a low correlation with the financial sector. This is broadly true, as many companies continue to consumer natural resources well into a financial downturn in hopes of being well positioned for a rebound. However, as more and more of the activity in natural resources is being driven by investment and speculation, this lower correlation is likely to rise.

Investment Options for Natural Resource Investors
So, you've heard the reasons and are wondering where to start. Fortunately, there is a wider range of investment options than ever before.

  • Direct investment: investors can always buy a resource directly. This approach works well for smaller investments in precious metals, but it quickly becomes impractical when speaking about timber, natural gas and other resources that require large storage facilities with associated costs.
  • Futures and Options: the contract-based approach to trading resources allows investors to leverage their dollars on a shorter time frame than storing a physical resource for months and months. These are great investments for experienced traders, but futures and options can be baffling to all but these specialists.
  • Exchange-Traded Funds: natural resource ETFs are just another example of how ETFs can help an investor gain broad market exposure with just a few investments. Natural resource ETFs all contain a different flavor of what they consider essential, so finding the right one can take some looking. The good news is that there will likely be one that fits your exact needs waiting for you to find it.
  • Stocks: ETFs are, of course, made up of stocks. Investors can cut out the middleman and buy these natural resource company shares directly. These include mining stocks, forestry stocks, oil exploration stocks and on and on. Generally speaking, there are two types of natural resource companies: majors and juniors. Majors offer a diversified play from extraction to processing to market sales with possibly a dividend to boot. Juniors are a pure play and very sensitive to price movements. They usually offer no dividend, but can serve up large returns if the natural resource they control increases in value.

SEE: How To Invest In Commodities

The Bottom Line
Natural resource investing is growing. In the 1970s or even the 90s, you couldn't easily make an investment in water. You would have to figure out which companies received a significant amount of their revenue from water and then buy them. Now you can cut out those steps with the Powershares Water Resources (PHO), among other ETFs. In other areas, the change has just been a further increase in choice. You can still buy shares in a coal mining company or buy coal ETFs, trade coal futures or even buy a shipment of coal to store - there are very few limitations to natural resource investing. With the choice of investments and the demand for these resources increasing together, this is a very intriguing area for investors.

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Natural Resources Mutual Funds (FSCHX, AWTAX)

    Discover which mutual funds in the natural resources category are top-rated funds, and understand why these funds may be suitable as part of a portfolio.
  2. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  3. Stock Analysis

    Best Stocks to Buy for Around $1 (NXTD, MBII)

    Watch for strong technical indicators and other positive information when considering the purchase of any stock trading in the $1 range.
  4. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  5. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  6. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  7. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  8. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  9. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  10. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
RELATED FAQS
  1. What are the primary reasons for investing in the chemicals sector?

    There are many reasons for investing in the chemicals sector, including portfolio growth, diversification, and hedging against ... Read Full Answer >>
  2. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  6. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center