by Roger L

Created on: January 01, 2010   Last Updated: January 03, 2010

Investing in foreign currencies or commodities is full or risk.  If you were to compare the two, forex, or foreign exchange trading, is inherently riskier than commodities trading for a couple reasons.  The first reason is because of the nature of the item being traded, Currency is a riskier investment than hard assets (aka commodities).  Currency can theoretically become worthless, and has been shown to be capable of depreciating a great deal.  Because no country is on the gold standard anymore, the value of a currency can easily be manipulated and money can be printed at will by governments around the world.  A commodity on the other hand has intrinsic value in the world.  Oranges, oil, and silver are necessary items in the economy and will always be worth something.  It takes labor and money to grow and orange or extract oil from the ground.  It is frightening simple to print some money.

A second reason foreign exchange is riskier is because of the leverage employed with forex investments and trading.  Forex accounts are margin accounts that allow for one hundred to one leverage.  For instance, if you have an account with 1000 US dollars, you can purchase 100,000 US dollars worth of a foreign currency.  This essentially means that if the currency goes down by 1%, you lose your entire investment.  Some forex traders even employee higher leverage, such as 250 to 1.  The only other way to trade currencies is to physically buy currency from a bank or other financial institution.  This, however, is not very common and relatively inconvenient since you would have to physically store the currency.

Commodities are typically traded on the futures market.  Investors buy and sell contracts for the rights to a given commodity from a commodity producer.  For instance, you may purchase a contract to buy an ounce of gold due to be delivered to you in 12 months time.  If you hold the contract and don't sell it before the expiration date, the gold will be physically delivered to you.  Other ways to trade commodities would be physical ownership or ETF's.  There are certain ETF's that own physical items, such as the GLD owning gold.  Other ETF's actually purchase futures contracts and roll them over at expiration.  In any event, investing in commodities is much less leveraged, and therefore the downside is less intense.

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