How to Invest In Commodities: Top 3, Energy, Metal, & Currency


Many people choose to invest in commodities such as gold, oil, coffee and silver. The idea is that they want to spread the risks by exposing their portfolio to markets that are not as easily affected by inflation and world events.

In this article, you will read all about how to go about trading in commodities.

So, how do you invest in commodities?

You can invest in different ways. Either in specific commodities, commodity companies or in commodity funds. If you want to invest in specific commodities yourself, you can trade in listed commodity certificates, futures, ETFs. There are also commodity funds that only invest in energy commodities (such as oil and natural gas), metals (such as gold and silver), cereals and food (such as soybeans, corn, coffee, cocoa, cotton) – and there is a mix of all these.

There are also commodity funds that invest in various commodity companies in the oil, mines and metal sectors. Another variant is to invest in commodity companies, but involves a greater risk as there is also a corporate risk to take into account and not just a market risk.

What is the market for commodities?

The trade conflict between the US and China and a weaker global industrial economy have led to falling commodity prices in 2019 and are also expected to continue in 2020.

The lower demand for raw materials is driven not least by China, the world’s largest commodity consumer, as the economy gradually moves from an industrial economy to a more service-producing economy.

Instead, the price of gold has risen, which is not unusual when the economy weakens and central banks begin to lower interest rates again.

What commodity do you think will be interesting in the next year?

The shift from fossil fuels to renewable energy sources (such as solar cells, wind turbines) and the production of electric cars will increase the demand for metals.

Metals such as cobalt, lithium are included in the production of energy-efficient batteries.

But copper and nickel will also be interesting because these metals are used more in the production of electric cars than in fossil-powered cars.

To meet the increased demand for metals, more mines will be opened but also an increasing metal recycling.

What parameters are useful in the analysis of commodities?

GDP, industrial production and cyclical indicators such as the purchasing managers’ index are key parameters that show the activity in the economies.

A high level of activity (growth) means an increased demand for raw materials and thus rising prices. High raw material prices in turn stimulate increased raw material production.

Inventory statistics and industrial companies’ investment plans are other parameters.

Currencies and interest rates are also important parameters. Low interest rates tend to increase investment interest in commodities and drive up commodity prices.

Since commodity prices are largely priced in dollars on the world market, it is important to follow the US dollar.

Political decisions such as climate policy measures, export restrictions, increased tariffs, strikes, natural disasters (drought, floods) must also be taken into account in a raw material analysis.

The benefits of investing in commodities

There are many benefits to investing in commodities. Especially since commodities have no correlation with traditional equities and mutual funds.

This means that the commodity price is not affected by ups or downs on the stock exchange. Due to this, one can consider whether one’s investment portfolio should include some form of commodity investment.

By investing in commodities, you can spread the risk in the portfolio. It is common to have at least two or three commodity investments in your portfolio.

Americans usually say that the investment portfolio should always contain ten percent in gold. This is because it is usually a stable investment in the long run.

Another positive factor with raw materials is that it is extremely difficult to influence or manipulate raw material prices. At the same time, there are raw materials that often follow a specific pattern, depending on the season.

This makes it easier to predict how the price will vary, which is something you can take advantage of.

Furthermore, the supply of raw materials is relatively constant, unlike goods that are produced.

Currency is an important factor when shopping for commodities

Currencies (especially dollars) are also a factor affecting the price of many commodities. Keeping track of the exchange rates for the different currencies and how they change is a must.

Otherwise, there is a risk that your investment will not be so beneficial after all. There are different ways to invest in commodities.

The obvious way is to buy physical raw materials such as a gold ingot or a silver piece of jewelry. However, it is not the best option as physical raw materials that are purchased often get a surcharge.

Due to this, you need to pay between 5-15% more than the actual value of the raw material.

If you are going to invest in physical raw materials, you should therefore know that you can get a good price.

Top 3 ways on how to invest in commodities:

1. Commodity funds

If you already have a fund deposit and want to spread your risks further, commodity funds are an excellent alternative. Commodity funds are high-risk funds that invest in a predetermined number of commodities.

Before you choose to invest in a commodity fund, read what the fund focuses on when it comes to investing in commodities and what currency they trade in.

The fund fee is also an important part, an excessively high fee can make your investment not as profitable as it seemed in advance.

Commodity funds are thus a simple and good alternative for those who want to trade in commodities and further diversify their portfolio.

2. Commodity certificate

Another option is to trade in commodity certificates or to buy shares in a mining company or a producer.

The latter option is often not particularly attractive as there are many factors that affect how the value of the share changes for the company.

Commodity certificates are a better investment in this case as the value of the certificate directly follows the commodity price.

With commodity certificates, you can trade in the same way as you trade stocks or mutual funds. You can then either choose a raw material certificate for a specific product or a certificate that contains several different raw materials.

Commodity certificates are a good alternative for the beginner, due to the simplicity of a relatively low risk.

3. Other similar securities

Other options to trade with are futures, CFDs or options. The disadvantage of these options is that the risk is great and that you can lose a lot of money.

With a CFD contract, however, not much effort is required, but on the other hand you can lose a lot of money in a short time.

Options require more capital and it is a more complicated variant in terms of pricing. However, the supply of raw materials is large.

Different types of commodities for investment

Raw materials can generally be divided into five main categories with a total of 24 subgroups.

Energy

  • Crude oil
  • Natural gas

Metals

  • Gold
  • Silver
  • Copper
  • Aluminum
  • Platinum
  • Palladium


Livestock

  • Cattle
  • Young beef
  • Pork belly
  • Slaughter pig

Cereals

  • Soybeans
  • Maize
  • Wheat
  • Rice
  • Oats
  • Grain

Food

  • Coffee
  • Cocoa
  • Sugar
  • Cotton
  • Timber
  • Orange juice


In addition to these raw materials, there are of course a number of others that are traded around the world, for example plastic is traded on the London Metal Exchange and Dalian Commodity Exchange in China.

Conclusion

If you want to expose yourself to the commodity market, you need to know several things. There are different raw materials.

They can be divided into hard and soft, as well as metals, energy, agricultural products and livestock.

Depending on the type of trader you are, you need to familiarize yourself with the market situation, and review how you want to invest in the raw material.

Many commodities can be traded through CFDs, ETFs, stocks and certificates.

In addition, experts have emphasized that some commodities are more suitable for short-term trading and others for long-term.

This is based on the volatility of the various commodities.

Sources

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https://www.summerhavenindex.com/assets/history_of_commodity_indexes.pdf

https://journals.co.za/doi/abs/10.10520/EJC-1efd318422

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https://link.springer.com/chapter/10.1057/978-1-137-43281-0_4

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https://books.google.se/books?hl=en&lr=&id=XJXlqpO1yV4C&oi=fnd&pg=PR7&dq=How+to+Invest+In+Commodities&ots=Zom25nTcqG&sig=KRJK26aOyT56x5bJS4YS_ftMOtE&redir_esc=y#v=onepage&q=How%20to%20Invest%20In%20Commodities&f=false

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=893264

https://www.watrust.com/downloads/wealth-management/whitepapers/Whitepaper-CommoditiesPortfolioPerformance.pdf

Kevin

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policies.

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