Goldman Sachs sent a shock wave through commodities markets today as it advised clients to close several commodities trades it had previously recommended (a weighted basket of oil, copper, cotton, soybeans, and platinum, and individual bets on copper and platinum). Notably, the investment bank warned that, “at prices above $125 per barrel… the risks are becoming more symmetric, which shifts the risk/reward of being long oil.” (English translation: Owning oil now looks increasingly like a coin toss.) Here’s what you need to know.

The rule for buying commodities
I’m going to go in with Goldman on this call. Commodity markets are cyclical, and Bill Miller’s April 2006 assessment of commodities looks applicable today: “The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now.”

Individual investors who own commodity ETNs such as United States Oil (NYSE: USO) or the iPath GSCI Oil TR Index ETN (NYSE: OIL), take heed. (In order to track these commodity ETNs using My Watchlist, click here.)

The rule for buying oil producers
Similarly, for oil companies, the time to buy their shares is not when the price of oil is hitting highs and they are gushing profits, compressing their price-to-earnings multiples. Opportunity arises when profits are depressed and their multiples look elevated.

If we consider oil majors Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS-A), and Conoco Philips (NYSE: COP), all have beaten the S&P 500 over the following periods: 3 months, 6 months, 1 year, and 2 years. And they haven’t inched ahead; the gains above the index are substantial. Exxon Mobil (NYSE: XOM) has done the same, except over the 2-year timeframe. I’m not calling a top here; these shares have some room to run yet before multiples bottom out, but they are not compelling right now. (In order to track these shares using My Watchlist, click here.)

Goldman on gold
Finally, it’s worth noting that Goldman is recommending that clients remain long gold. Shareholders of SPDR Gold Shares (NYSE: GLD) may be pleased to hear that. That looks like a reasonable speculation in the short term, but gold is overpriced by historical standards and will correct at some point.

If you’d like to track these the commodity ETFs/ETNs mentioned in this article using My Watchlist, click here. Alternatively, if you’d like to track the group of integrated oil majors, click here. You'll get valuable updates as well as immediate access to a new special report, "Six Stocks to Watch from David and Tom Gardner." Click here to get started.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.