How to invest in commodities? There are different ways you can invest in commodities. The easiest and most diversified option is to buy commodity ETFs. You can buy physical commodities as well, for example gold coins.
What are commodities
Commodities are basic goods that can be traded and held as physical products. Unlike stock ownership documents, commodities actually have physical products backing them. Commodities can be bought and sold online as well, for example, through options and futures.
Some examples of commodities below
- Energy, such as
- Oil
- Natural Gas
- Grains, such as
- Corn
- Soybeans
- Wheat
- Industrial metals, such as
- Copper
- Aluminum
- Zinc
- Nickel
- Precious metals, such as
- Gold
- Silver
- Softs, such as
- Sugar
- Coffee
- Cotton
- Livestock, such as
- Live Cattle
- Lean Hogs
These are not all the commodities out there, just some examples to help you understand what they can be. All of the above and some more are included in the Bloomberg Commodity Index. More about that below.
Commodities vs Stocks
On the chart below we are comparing the performance of S&P 500 index, and Bloomberg Commodity Index since 2007 to January 2022.
As you can see, the prices of commodities might even have a reverse correlation with stocks. The candlesticks represent S&P 500 index, and the orange line represents Bloomberg Commodity Index. Don’t let the performance of the commodity index scare you, even if it doesn’t look good on that chart. It can still be a good diversification in your portfolio. Stocks have been in a good uptrend for over 10 years. There is no guarantee of this continuing.
Are commodities good investment
Commodities can be good diversification on an otherwise stock-heavy portfolio. The correlation between commodities and stocks varies. Sometimes when stocks fall, commodity prices rise or the other way around. Still, sometimes when stocks fall, commodities fall with them.
Investing in physical commodities can be a fun change as well. For example, buying physical gold coins can be a fun way to invest and collect them. There are a lot of different ways you can buy physical gold, and it is a fascinating sight. I have a post about gold as an investment, you can read it here.
The prices of commodities are determined by supply and demand. If you want to take a deeper look at supply and demand, I have a post about that as well, you can read it here. Supply and demand in commodities work like this as an example:
Since the pandemic hit, oil countries have been producing less oil. However, demand for oil has stayed the same. Because production has been reduced but there is still a lot of demand, the price of the oil has risen. If, on the other hand, the oil countries would produce more than the customers needed, the price of the oil would likely fall. There are numerous factors that affect prices, supply and demand being one of them.
My experiences in commodities
I have commodities in two different forms. I have an ETF that follows Bloomberg Commodity Index. Holdings of that index and how it manages its portfolio can be found on its Wikipedia page. (https://en.wikipedia.org/wiki/Bloomberg_Commodity_Index) There are a lot more ETFs and ways to invest in commodities as well, you can buy just an oil ETF if you see that as better option.
I also have a few gold coins. Buying them was half investment and half pleasure. It was a nice change to actually have physical investments, since stock ownerships are no longer on paper.
Commodities have been a good diversification to my portfolio. Even though stocks have been in a downtrend since the beginning of 2022, the commodity index has risen steadily. Even if buying several stocks and funds is considered diversification, after all, if stocks fall in the USA, usually the rest of the world will follow. This is where commodities can come in handy. They are not so correlated with the movements of the stock market.
This is not investment or financial advice. Past returns are not a guarantee of future returns. Always do your research before risking your hard-earned money.