Posted September 27, 2022
Commodities are raw materials and unprocessed goods consumed directly or processed and resold. A few types of commodities are gold, oil, wheat, and cattle. These are all investments that can benefit you.
There are various ways you can invest in commodities. You can either have physical contact with the actual commodity or you can trade futures contracts and ETFs. Futures contracts are an agreement traded on a futures exchange to buy or sell assets, especially commodities at a fixed price set to be delivered and paid for later. For the average investor the most popular option is futures contracts and ETFs because you’re not in possession of the commodity itself, yet you can reap the benefits from your investment.
There are a few things to note when investing in a commodity. Supply, demand, inflation, exchange rates, weather, and geopolitics can all affect the returns received from commodities. While inflation can be viewed negatively, the prices of commodities typically rise as inflation rises.
Three of the most commonly traded commodities are gold, oil, and metals.
Gold is used in our jewelry and technology, as well as by banks and investors. Gold is typically a safe investment and a hedge against inflation. It is important to note that when the U.S. dollar decreases in value, you can trust gold prices will increase in value. You are able to invest in gold bars and coins, which require storage in a safety deposit box or vault. There is also the opportunity to invest in gold ETFs which give you exposure to gold without physical possession of it. Futures contracts would be an option as well; there is additional risk with futures contracts because you have to deposit an initial margin. If the price increases, you’ll profit, but if price decreases you could lose your money.
Crude oil is used in many of our daily products; such as gas and any product made from petroleum. Crude oil prices react to the laws of supply and demand. The higher the demand, the lower the supply which causes prices to increase. Once the demand decreases, prices will decrease because supply is consistent. A great example is gas prices increasing in the summer causing crude oil prices to increase. Ways to invest in crude oil are futures, oil companies, ETFs, and more.
Commodities are worth learning about because they are involved in our everyday life, and they allow you to diversify your portfolio. Diversifying your portfolio is important because it lowers your overall risk.