Top 5 Commodities to Invest for Long Term Goals

What is Commodity Investing?

Commodity trading is one of the oldest form of trades, far older than stocks, bonds or other financial instruments. In the early days, trading was done in spices and silks, whereas in the modern days, commodities are traded on commodity exchanges which function similar to a stock exchange. Everyday millions of investors invest in the commodity market for trading and long-term investment. Investment in the commodities can be done directly in physical commodities or indirectly by the purchase of shares in commodity companies or exchange traded funds (ETFs).

Benefits of Commodity Investing

Investing in commodities comes with various benefits for the investor, the biggest one being the protection against the effects of inflation. It has been observed that during the time when the inflation is high, the demand for commodities increases which in turn hikes the price.

Also, apart from all the benefits of diversification, commodity investment also holds the potential to maximize the returns. Though the prices of commodities are influenced by various factors like exchange rates, interest rates and market fluctuations, the global demand is very strong. This has a direct positive impact on the stocks of all those companies which are dealing specifically in commodities, which results in positive returns for the investors.

Risks of Commodity Trading

The biggest risk of investing in commodities is that they tend to be highly volatile, more than any other investment instrument in the financial market.

Investing in commodity futures requires speculation because these contracts have an underlying asset. This directly influences the performance of the contract and therefore provides a negative or positive difference to the investor. Investing in futures also incurs a unique set of risks which requires an independent management.

Now since we have discussed about the basics of investing in commodities along with the benefits and risks, let us discuss about some of the best commodities for investment for you.

The Best Commodities for Long Term Investment

Gold: Investment in Gold is one of the very few commodities which has an ever growing and profitable market. Even after considering all the market fluctuations, the performance of gold is very high. The demand of gold has a direct impact on its price which means that with a rise in the demand of golds, the prices will rise. Investing in physical gold in the form of bars, coins and jewelry is widely practiced. Investors and institutions invest in gold to increase their money reserves.

Crude Oil: Crude oil enjoys the highest liquidity in commodity market which makes investing and trading quite comfortable. However, it is one of the most volatile commodities as well and a risky one too. After the Covid-19 pandemic the prices of Crude oil have been wobbly. The supply of crude oil is in abundance against the demand and therefore if there is any surge in the demand of crude, the prices will rise as well.

Coffee: Coffee is one of the leading essential item commodities. Being an essential item commodity means that the demand is still high in case of unfavorable economic conditions. This means that it holds a low risk. However, this also means that the profits are also limited. Investing in coffee is usually not done physically and done through derivatives and contracts,

Steel: Steel falls under the category of base metals or industrial metals. The demand for steel is very high as it is one of the key components for most of the manufacturing industries like infrastructure, automotive etc. Whenever there is a growth in any of these industries, the demand for steel will increase which will have a direct impact on its price. Even after a rough start the prices for steel have recovered. Investing in steel cannot be a feasible option for short term investments but it may yield very good returns in long term.

Natural Gas: Similar to crude oil, natural gas stocks are highly volatile. Any slowdown in the economy results in collapsing of the natural gas stocks. With an increase in supply, the prices of natural gas go down, which means that the price of natural gas is inversely proportional to the supply. It may be a good option for long term investment because the prices of natural gas are expected to rise once the economy opens up.

Investing in commodities should be done after considering some parameters including the levels of production across the world, onboarding of new supply sources and exploration of potential supplies. Some of the other commodities for consideration include silver, cotton, soybean etc. But it must be noted that the commodity market is highly volatile. Therefore, if you don’t have proper experience and knowledge it is better to take the service of a SEBI registered investment advisor who will provide you research based recommendation for investing in commodities.