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What are commodities

So what are commodities and should you invest in them?


Commodity investing can involve investing in raw materials such as, oil, gas, gold, silver, copper, platinum and other precious metals, but it can also involve investing in other soft commodities that are grown, such as, crops and livestock, for example, coffee, soybeans, wheat, cotton, and even lean hog.

Commodities are volatile

Be aware that commodity investing is volatile, and although large gains are possible, so are large losses. This is why commodity investing is not ideal for new investors, other than in having a small part of an otherwise diversified portfolio, allocated to the more common commodities, such as precious metals.

Commodities can be used to diversify

Many mixed or diversified global portfolio funds or ETF's will contain some of the most common commodities, but usually only about 5% of the overall portfolio value. So if you had such a fund in your investments, you would probably already have some exposure to the likes of oil and gold and possibly some other types of commodities.  

Commodities can be used as a hedge

Professional investors often use commodities as a hedge against share volatility and inflation, as it is thought that the likes of gold, silver and platinum generally rise with inflation over the long term, and also perform well when the stock markets are volatile, and declining. Gold in particular is well known to be a hedge against rising inflation. 

How much of my portfolio should be commodities?

It is generally accepted that no more than five per cent of a portfolio should be exposed to commodities, unless you really know what you’re doing, and as you are reading the what are commodities page on this website, you probably shouldn't invest more than the 5% noted above.

There are several different ways of gaining exposure to commodities, but we shall just discuss the easiest for now, as storing gold bars under the bed, and having lean hogs running around the garden, can be problematic!

As with other investments, the easiest and cheapest way of gaining exposure to all sorts of commodities is either via a fund or trust or by using an ETF.

You could choose just a gold fund, or a gold, silver and platinum fund, or an all types of precious metal fund. You can even choose a fund with all commodities listed if you wanted real diversification.

What are commodities average return?

As well as being very volatile, meaning you could make 50% one year and lose 50% the next, commodities also suffer from a lack of income. They produce no income, so can’t pay any income, unlike dividend-paying shares or property, which can.

Generally, the only way to profit from a commodity is to hope the price increases from where you originally bought it, over a long enough period. Although they can increase or decrease by 10%-20% in just a few weeks or months!

What are the commodities most shorted?

City traders and expert investors can also profit from commodities going down in price by “short selling” them, but this is not recommended for new investors and is beyond the scope of this website. However, the most common short traded commodities are oil, gold and silver.

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