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Thursday, 18 April 2024 16:26

Investing in commodities - what should you know?

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In recent years, there has been a resurgence in the number of people investing in commodities. Investing in tangible commodities like metals or crops is a way investors can diversify their portfolios and hedge against inflation during tough economic times.

 

The commodity market can be influenced by various factors including supply and demand dynamics, geopolitical events and macroeconomic trends. We’ve outlined everything you need to know about commodity investing below.

What are commodities?

Commodities - in the context of trading - refer to basic goods that are either grown, mined or produced. They’re usually used in the production or making of other goods and services.

Commodities are generally divided into two categories: hard and soft.

  • Hard commodities: natural resources that must be mined or extracted, such as oil, gold and copper. These are often used as inputs in industries and are heavily influenced by economic cycles and geopolitical stability.
  • Soft commodities: agricultural products like wheat, coffee and sugar. These are more susceptible to changes in weather conditions and seasonal cycles.

Commodities are traded on specific exchanges, where buyers and sellers agree on a price based on supply and demand dynamics.

What commodities deliver the highest returns?

Normally, precious metals like gold and silver perform well during times of economic uncertainty as investors look for safe-haven assets. Industrial metals like copper and nickel tend to be most lucrative during times of economic growth as they’re often used in construction and manufacturing - both of which boom during periods of buoyancy.

Energy commodities, particularly oil and natural gas can also deliver some high returns, especially following geopolitical tensions that influence prices.

How to invest in commodities

Investing in commodities can be direct or indirect:

  • Direct Investment: This involves purchasing physical commodities. For example, buying gold bars or barrels of oil. This method involves handling and storage costs and is generally less accessible to most investors.
  • Indirect Investment: Most investors prefer indirect methods of commodity trading, such as investing through commodity futures, options and exchange-traded funds (ETFs). Investing in commodity-based shares and funds can provide indirect exposure to commodities and you can do this through online trading platforms such as Tradu directly from your home.

Final thoughts…

If you’re looking for a way to diversify your portfolio during tough economic times, commodities might be the answer. Often touted as a ‘safe haven’, commodities are a unique asset class offering several benefits. However, it’s important to note that the market is susceptible to sudden price changes due to various influencing factors. For this reason, investors should conduct thorough research before investing in commodities as they can be risky if you don’t know what you’re doing. However, if done correctly, commodities can be the answer to combat high inflation rates.