How to invest in Commodities
If you have ever come across an article or had a conversation about finance or business with someone, you have most certainly also read or heard of the term ‘commodities’.
What exactly is a commodity?
Simply put, a commodity is a physical basic tangible good which is publicly traded in bulk and is fungible; it is interchangeable with other goods of the same type, whether they come from the same producer or not. A commodity can be a natural resource or agricultural product. Think of a barrel of oil or a bag of sugar for example. No matter the producer, it is basically the same product.
Traditional examples of commodities include oil, gold, grains, beef, coffee, and natural gas. More recent examples of commodities include foreign currencies and even bandwidth. Commodities affect the prices of lots of things people use every day all over the world, such as gas, food, clothes, and jewellery.
In the history of finance and trading, commodities rank amongst the oldest types of wealth. Examples include the spice trade and the Silk Road, as well as the use of gold as currency, which had such an impact on the strength and growth of civilisations and societies.
Together with stocks, bonds and property, commodities are considered one of the major asset classes of investment. Like the above, commodity prices are ultimately governed by supply and demand, which can be affected in various ways, such as economic uncertainties, pandemics, unusual weather patterns, wars, or natural disasters and even investors’ risk profiles. This makes investing in commodities a high-risk investment.
List of Commodities
Commodities can be sorted into two main kinds, hard commodities and soft commodities. Hard commodities are those which need to be extracted or mined. Soft commodities are usually agricultural products.
Some popular examples are:
Within these categories, there are four groups of commodities:
- Energy (hard commodity): This includes commodities such as crude oil and natural gas.
- Metals (hard commodity): This includes both industrial metals and precious metals (like gold and silver).
- Agriculture (soft commodity): This includes crops such as corn, wheat, sugar, and coffee.
- Livestock and meat (soft commodity): This includes animals and animal products such as cattle and milk.
How to Invest in Commodities
Most investors buy commodity-related stocks or funds, Exchange Traded Funds (ETFs) or options on futures contracts, although it is also possible to invest in physical tangible goods and substances directly.
The prices of commodities generally tend to move in the opposite direction from securities such as stocks and bonds, even though they are considered highly volatile and high-risk. It is for this reason that many investors turn to commodities when the stock market is performing poorly. Some commodities are considered as being a good hedge against inflation.
Subsequently, commodities can be an important way for an investor to diversify their financial portfolio beyond traditional securities, to help reduce risk and smoothen out returns.
Trading in futures contracts is usually carried out on the floor of a commodity exchange, so their fluctuating prices are posted openly.
Commodities are traded on a futures market where those people who produce goods and those who buy them negotiate for payment. They set up contracts which determine a future date when the goods will be delivered. On that date, the commodity is traded at the price found in the contract, whatever the current price of the good is.
Why invest in commodities?
Like all investments, commodity trading can carry a risk. However, although commodities are susceptible to a variety of risks, investing in commodities still carry several advantages.
Firstly, as we have seen, investing in commodities can be used to add diversity to your portfolio as they act as a counterweight to stocks. They also act as an inflation hedge, which sees the price of commodities generally rising with inflation, while the value of the dollar shrinks.
Furthermore, some commodities are less volatile than others; in general, precious metals such as gold and silver have a more stable value than those commodities that could be affected by adverse weather conditions, for example.
Need the best advice and information about the best commodities to invest in? Contact our highly-qualified and experienced commodity trading advisors today.
Why is Gold a valuable Commodity?
The king of precious metals, gold has always been what is known as a ‘safe haven’ during economic instability and events such as war, seeing as the gold market is not affected by global incidents and supply and demand in the same way as some other commodities.
Throughout world history, gold has also been used both as a form of currency and a marker of wealth. One of the very first metals to be mined, gold is a stable commodity when markets are in economic turmoil, so adding it to your portfolio could help reduce volatility and risk. It is also more resistant to inflation than some other commodities.
Gold is one of the most widely traded raw materials around the world, but there are other precious metals that serve as commodities and also have high liquidity such as silver, platinum, and palladium.
Like many other commodities, the price of gold can fluctuate depending on political, social, and economic unrest, but it is rarely impacted by governmental decisions or inflated by interest rates.
If you decide to include precious metals such as gold to diversify your financial portfolio, your deVere financial advisor will be able to give you information and assist you according to your specific needs.
Why is Crude Oil a valuable Commodity?
Also known as ‘black gold’, crude oil is one of the most actively traded commodities worldwide. This raw material is used mainly in manufacturing such as plastics, petrochemicals, pharmaceuticals, textiles, and the auto industry.
Although trading within the oil markets can be risky and oil prices are highly volatile, crude oil is considered a liquid commodity, meaning that it can be traded in large volumes. As an investor, you can buy stocks in oil companies, or in crude oil mutual funds, or ETFs. You could also purchase shares in mutual funds or energy sector ETFs, which invest directly in oil company stocks.
What are Commodity Funds?
As the name suggests, a Commodity Fund invests in commodities, such as precious metals oil and natural gas, and agricultural goods. A Commodity Fund may also invest in the companies that produce these commodities. There are several different types of Commodity Funds, including Index Funds, ‘true’ Commodity Funds and Futures-based Commodity Funds. Some funds invest directly in a commodity such as gold bullion, while other invest in companies that deal with commodity related products or in commodity future markets, whereby commodities are bought at a predetermined future date and price. Some funds are a combination of the above. A Commodity Fund delivers various benefits to investors such as diversification, protection against inflation, and potential financial growth.
Are Commodities a Good Investment?
Just like with any other investment, commodities can be a good investment, but they can also come with risks. Anyone intending to invest in commodities must understand the markets of the commodity in which they wish to trade, for example keeping an eye on oil prices, according to what is going on politically in the Middle East, and so on. Contact deVere’s financial advisors for more information about investing in commodities.
What are some examples of Commodities?
There are several commodities available to invest in. Energy commodities include crude oil and natural gas; metals commodities include gold and silver; agriculture commodities include wheat and coffee; livestock and meat commodities include cattle and milk.
What do Commodities Traders do?
Commodities traders buy and sell physical commodities such as metals, agricultural products, or oil. They need to react swiftly to events such as natural disasters and economic crises that can impact various commodity markets in different ways.