The complete Guide to Invest in Commodities

Investing in Commodities

Investing in commodities can be done in a variety of ways. One option is to buy various amounts of physical raw materials like precious metal bullion. Futures contracts or exchange-traded products (ETPs) that directly track a single commodities index are also available to investors. These are high-risk, high-complex investments that are usually only recommended for experienced investors.

Mutual funds that invest in commodity-related businesses are another option to obtain exposure to commodities. An oil and gas fund, for example, might invest in equities from companies involved in energy exploration, refining, storage, and delivery.

Advantages of Commodity Investing

Diversification

Commodities and commodity stocks have a different return profile than other equities and bonds over time. You can better handle market volatility by having a portfolio containing assets that don't move in lockstep. Diversification, on the other hand, does not guarantee a profit or protect against loss.

Returns

Supply and demand, exchange rates, inflation, and the overall health of the economy can all affect individual commodity prices. Increased demand due to huge global infrastructure projects has had a significant impact on commodity prices in recent years. Commodity price increases have had a beneficial impact on the stocks of companies in connected industries in general.

Inflation Protection

Inflation, which can depreciate the value of stocks and bonds, can lead to rising commodity prices. While commodities have performed well during periods of rising inflation, investors should keep in mind that commodities are far more volatile than other investments.

Disadvantages of Commodity Investing

Principal Risk

Commodity prices can be extremely volatile, and world events, import bans, global competition, government laws, and economic conditions can all have an impact on commodity prices. There's a danger that your investment will depreciate in value, however, the risk can be reduced up to an extent if you plan to invest for the long-term.

Exposure in Foreign and Emerging Markets

Commodity funds, in addition to the risks associated with commodities investing, also carry the risks associated with investing in foreign and emerging markets, such as volatility induced by political, economic, and currency instability.

Asset Concentration

While commodity funds can help with diversification, they are deemed non-diversified since they invest a large amount of their assets in a small number of individual securities that are typically focused in one or two industries. As a result, changes in the market value of a single investment may generate bigger share price swings than in a more diversified fund.