What are commodities?
Commodities are the raw materials that feed our economy: metals (such as gold, silver and platinum), natural resources (such as oil, gas and timber) and agricultural crops (such as wheat, sugar and cocoa beans).
Unlike some investment opportunities, commodities are physical assets with their own intrinsic value. This means they behave differently from conventional investments, often performing in a way that runs counter to other major assets, especially stock markets.
Investing in Commodities
People choose to invest in commodities because they act as a counterbalance to unexpected movements in the financial markets. By diversifying a portfolio with commodities, investors can hedge against inflation and stock market uncertainties, increasing their chances of achieving long-term profitable returns.
There are three fundamental approaches open to investors wishing to expand into commodities:
- Buying an actual commodity, such as gold bars, can be a cost-effective strategy, though there are storage and insurance costs to be taken into account.
- Investing in a company directly involved in obtaining the commodity – extracting oil or growing wheat, for example – is relatively simple, though it leaves you exposed to the fluctuations of the broader economy.
- Investing via an investment consultancy who will invest directly in a range of commodities on your behalf to maximise diversification and financial returns.
Anyone seeking an income directly related to the performance of a particular commodity, or basket of commodities, therefore, has a range of options to choose from, each catering for different investment needs and attitudes to risk.