Tickers in this Article: KFT, SLV, GLD, GSG
Despite the sudden plunge in commodity prices over the last few days, the reality is that consumers are probably going to have to deal with them for the foreseeable future. Oil prices have dropped by more than 10% in the past week while silver has plunged more than 20% in roughly the same amount of time. Those were the headline declines. In fact, all commodities including grains and metals have retreated in the most recent commodity sell off. However, while the dip has proved that prices can't go up forever, most indicators are pointing to high prices in commodities for a long time to come. Here we look at why this is and what you should be investing in now. (For background reading, see 4 Companies Clipped By Rising Commodity Costs.)

Tutorial: Commodity Investing 101

A Natural Correction in Commodities
It's a natural fact of life that prices cannot go up forever; in the end, prices naturally revert back to the mean. Commodity prices have been experiencing a huge rally unlike any other asset class over the past year. It's only natural that the faster something goes up, the greater the chance of a sharp correction. How far commodity price will pull back is not a question I am qualified to answer as I can't predict human behavior in the short run, but today's reality seems to support higher commodity prices.

Earlier this week, Kraft (NYSE:KFT) reported that its sales grew by just over 4% quarter over quarter. The vast bulk of that increase was due to price increases that the company implemented to deal with rising commodity costs. In addition, Kraft continues to face significant costs pressures for the rest of 2011. As the second-largest food company in the world, Kraft is in a good positions to accurately assess the state of commodity prices. (For more, see Food Price Inflation Still a Big Deal.)

What Investors Should Avoid
Investors are best served to avoid betting directly on the commodity price itself. At current prices, most commodities are subject to extreme volatility and most investors aren't equipped to handle that. Over the past few days, the iShares Silver Trust (NYSE:SLV) has retreated from $46 per share to $34.On the other hand, most commodity-related ETFs still trade near all-time highs. The SPDR Gold Trust (NYSE:GLD) is trading for $143, not too far off its all-time high of $153. The iShares GSCI Commodity Index ETF (NYSE:GSG), which follows a broad basket of commodities, is trading at $35, just below its all-time high. (For more, see 7 Commodity ETFs To Know.)

The Bottom Line
Commodities are the basic building blocks of society. In the long run, the fundamental outlook for commodities remains healthy. If you have owned them for a while, it may make sense just to hold on. At the moment, record amounts of investment dollars are flowing in, which means they could be the first asset class to experience immediate outflows if the market environment turns sour. An investment is only a good one when made at the right price. The time to invest in commodities may require a little more patience at this juncture. (For more, see An Overview Of Commodities Trading.)

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