Scared of commodities? 4 tips for reducing risk

NEW YORK — For the hordes of investors who piled into gold and silver in recent months, the last few weeks have been an eye-opener.

Gold is down 5 percent this month after jumping 21 percent in the last year. Silver is down 30 percent after rising 78 percent. What they don’t tell you in those late night TV commercials is that if you’re going to buy gold coins, you better have an iron stomach. But there are steps you can take to minimize your risk.

1. Don’t overdo it

You shouldn’t have more than 10 percent of your money invested in commodities or commodity-based exchange-traded funds. The more you own, the greater risk you’re taking on. If you’re going to put a sizable amount of money into commodities, make sure you diversify and invest in more than one. As the drop in silver shows, you can quickly lose a lot of money if you’re exclusively in one commodity.

2. Consider stocks, not ETFs

The stocks of commodities producers can be far less volatile than exchange-traded funds that focus on a specific commodity. Pan American Silver Corp., a silver producer, fell 6 percent in one week earlier this month after hedge funds dumped silver. But the iShares Silver Trust, one of the largest ETFs that owns silver, fell 26 percent. It directly tracks silver, so if silver prices rise or fall sharply, it does too.

3. Find ways to hedge

Investors can protect themselves by buying stocks that tend to gain or lose value in the opposite direction of raw materials. Airline stocks work as a hedge against oil, for example, because airlines benefit from falling prices, says Spencer Patton of hedge fund Steel Vine Investments LLC. When oil prices fell two weeks ago, the Amex Airline Index rose 4 percent.

4. Think about your time frame

Oil prices will likely continue to go up over the next 10 years as demand increases, says Randy Warren of Warren Financial Service. But gold’s price increases may slow over the next year or two. Knowing what the outlook is for the commodities you want to buy will help you weather the price swings — or know that it’s time to sell.