Investing in commodities involves purchasing physical goods that also have real uses in the economy. Commodities can help investors diversify portfolios. And some investors have been able to earn lucrative returns from commodities. However, they come with a high risk and are often viewed as unsuitable for first-time investors.
The value of commodities are extremely challenging to predict for the short and long-term. Prices are based heavily on supply and demand. When demand increases, the material or product increases in value. This type of investment has a low correlation to the stock market and currencies. When the stock markets are down, commodities often go up in value.
Examples of commodities
Two of the most common types of commodities are gold and oil. Other popular examples of commodities include silver, copper, wheat, sugar and cocoa beans.
When economic uncertainty is prevalent, investing in gold is a popular choice. It is a tangible asset that is limited but still easy to purchase. If bought during a time of low demand, investors can earn significant returns.
On the other hand, oil is linked to demand from the largest economics across the globe and supply with oil coming from a limited stock of pipelines and wells. Additionally, supply and demand can even be impacted by decisions made by oil-producing countries for their own political or economic agenda. This can make oil investment extremely volatile.
Ways of investing in commodities
There are a range of ways to invest in commodities. An investor can personally buy and store the commodity themselves. This is an effective way to invest in precious medals, such as gold, which are valuable in small quantities. However, keep in mind that investors in the UK will need to pay 20% VAT in addition to the sale price.
Investors can also pay an intermediary service to store and hold the commodity on their behalf. This open has tax benefits; however, this is more risky as investors don’t see their commodity with their own eyes, so they need to watch out for scams.
Other ways to invest in commodities include using financial derivatives, buying shares in commodity Exchange Traded Funds or becoming a shareholder of a company that produces a commodity.
With many ways to invest in commodities, it can provide an effective way to diversify an investment portfolio. However, they are risky and are only recommended for advanced investors.
It’s recommended to receive professional financial advice when considering any form of investment to ensure you find the best investment option for you and your financial situation.