Tired of bonds, blue-chip stocks, and the same old investments, many investors turn to penny stocks for more excitement and reward potential. However, natural resource investing can provide the same excitement and rewards, but the risk potential is greater as well. You can invest in oil, precious metals, timber, natural gas, and even uranium, but natural resource investing involves a steep learning curve that is not suited for every investor.

Natural Resource Mutual Funds and ETFs

Tremendous industrial growth throughout China and the Pacific Rim has fueled an increased demand for oil and natural resources, diminishing worldwide supplies. At the same time, major oil fields throughout Saudi Arabia and other oil-producing companies in the Middle East are approaching depletion. With global demand for oil, iron ore, steel, and other natural resources doubling nearly every 10 years, demand will likely remain strong for the inevitable future.

This bodes well for natural resource investors, but what is the best way to begin investing in natural resources? There are a myriad of ways to invest in natural resources, but for investors with limited capital, natural resource mutual funds and exchange-traded funds provide ideal investment opportunities.

There are a number of funds that focus on natural resources and have holdings in companies that drill, mine, and process oil, natural gas, precious metals, and other natural resources. However, you should know that oil and natural gas prices experience wild fluctuations, and even though oil and natural gas prices may rise, a mutual fund’s value can actually drop. These risks should be considered when selecting your investments.

Similar to real estate funds, natural resource funds have a low correlation with the market in general as they tend to follow their own cyclical price patterns. The performance of these funds is also largely driven by new discoveries of mineral or fuel deposits.

Natural resource funds provide investors with diversified exposure to a significant segment of the global economy, and they’re often less risky than direct partnership programs. If you lack the capital required to purchase royalty interests and would like to add oil, precious metals, and other resources to your portfolio, than natural resource funds may be worth considering.

Natural Resource REITs

A real estate investment trust, or REIT, is common vehicle used by those interested in investing in timberland. Many REITs own or lease timber-rich land and profit from tree harvesting. Unfortunately, timber is a risk-laden, long-term investment. It takes years for trees to grow, and if the housing market crashes or goes into a lull, REITs can decline in value. However, REITs must pay 90 percent of their profits to shareholders, and rather than being taxed at the 35 percent marginal income tax rate, the income is only taxed at the lower capital gains tax rate.

Natural Resource Stocks

Another option is to directly purchase stock in natural resource companies, but this requires a lot of research. Not only must you examine the fundamentals of various companies and examine their past performance, but you also need to be aware of current issues influencing the price of certain resources and take their future outlook into consideration.

For example, copper was in huge demand in China during the beginning of 2011, because construction projects were occurring at a rapid pace. However, if a natural disaster were to occur, construction would have been halted and demand for the natural resource would have dropped accordingly. For novice investors or busy professionals, it may be better to choose a well-performing natural resource fund and let someone else stay up-to-date on such issues.

Natural Resource Futures

While investing in natural resource stocks takes a great deal of time and study, futures trading requires an even greater time commitment, not to mention a strong stomach. When trading futures, you’re essentially making educated guesses on the downward or upward movement of a commodity. Although there are many successful commodity futures investors, it takes a solid grasp of the social, industrial, political, and economic factors that affect the value of natural resources in order to bet successfully.

For example, there were only 10 sites in the entire world in which uranium was extracted in 2012. If political turmoil were to take place in any country that housed one of these sites, production could have been interrupted, increasing the demand for the resources produced from the remaining sites. If you lack the time or skills to keep up with and examine such data, trading natural resource futures may not be ideal for you.

Natural resource investing provides you with another long-term investment option, allowing you to diversify your penny stock portfolio and benefit from an increasing demand year after year. Although the performance of natural resource funds and other commodities investments have been more sedated as of late than they were in previous decades, with sound investment choices, you can benefit from solid long-term gains.

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