Why Invest in Commodities like Oil, Gold, Silver, etc.
You can invest in commodities such as oil, gold, silver, copper, platinum, pork belly, orange juice, coffee. But why would you?
There are different types of commodities; hard and soft. Hard commodities are natural resources while soft commodities are agricultural products.
From an investing perspective, most people invest in hard commodities for the longer timeframes, but even amongst these, some are usually just held for the purposes of trading.
What’s the Point?
Hard commodities are generally used to make stuff and things. So if you think we as a human race are going to make more stuff, then chances are there is going to be a demand for the commodities that go into these products.
The price of the commodities is therefore reliant on the demand for them, but also by how much of it there is. So the supply side is another element that comes into the pricing of commodity assets.
Certain commodities can play an additional role within your portfolio - that of an insurance product. Depending on the specific commodity, there can be price differences between it and other asset classes that mean it’s quite helpful to have some exposure to the commodity price.
^ That paragraph was a little confusing, but purposefully so. 1 - to make me sound cool and like I know what I’m talking about, but 2 - because the interaction between assets changes over time. So if I wrote something like “Pork goes down in price when the Egyptian Stock Market goes up”… that might be accurate today (it’s not), but if you read this in 2 years time it might no longer be true.
What matters is you invest in assets that act in different ways under different conditions. And that is part of the reason why people invest in commodities.
Some commodities are much easier to invest in than others. Things like precious metals are relatively straightforward with funds and ETF’s that give you exposure. But when it comes to the more obscure, soft commodities, it becomes a little different. Take Oil or Soy or Wheat as examples. The only way to gain exposure to them is via futures contracts, which are generally quite large and often require a potential physical delivery. We get around that by rolling contracts forward, but that can lead to differences in price from month to month that have nothing to do with the underlying price of the asset.
It gets very complicated very quickly, so for most people it’s easier to just stay out of it and leave it for the professionals to go broke trying to guess what’ll happen next.
How Can I Find Out More?
There are some specific commodity futures books out there, but as I say, for most people it’s fine to just know a little bit about a small number of the commodities and stick with that.
I cover commodities in my video course and Masterclass so if you’re keen to find out how to practically go about investing in these, and how they could form part of your portfolio, they might be worth checking out.