An interesting alternative investment idea is to invest in commodities. There are a large number of commodities out there and they relate to industries such as food, energy or metals. In this blog post, we will cover what commodities are, why would you invest in commodities and how you can invest.
What Are Commodities and Why Would You Invest in Commodities?
Commodities are an important part of industry and trade, and you’ll see them everywhere, from the fuel we use in your car to the food you buy in supermarkets to the raw material used to build pretty much anything in this world.
Perhaps some of the most well-known commodities out there are gold, silver, crude oil, natural gas, soybeans, and corn. Wikipedia has a comprehensive list of traded commodities for your reference.
Some of these commodities, like gold, act as a hedge against the stock market. One of the most successful investors in the world called Ray Dalio created a portfolio structure called the All-Weather Portfolio. The idea of this portfolio is that its makeup will perform reasonably well under all market conditions.
In that portfolio structure, a part of it includes commodities because when the stock market goes down, commodities, like gold, tend to go up in price, as they are considered safe-havens, and vice-versa.
How to Invest in Commodities
How do you trade commodities? There are several ways to trade commodities. Some of the most well-known ways to trade commodities are to buy futures contracts, options, ETFs that track commodity prices, or even buying some of the raw materials yourself.
If you want to buy gold, you could just go to a gold specialist shop and buy gold. That is obviously more expensive because the gold has been processed and the shop needs to make money from it too. On top of that, you still have to store the gold yourself, which is not safe.
When trading commodities, be mindful that they are somewhat risky to invest in. That’s because commodities can be affected by uncertainties that are difficult to predict. Examples of uncertainties could be weather events like flooding and wildfires, epidemics that could spread diseases on something like soybeans, and wars that can dramatically influence the price of crude oil.
When chosen carefully, though, commodities can help create a balanced portfolio.
Invest in Commodities is a part of our guide Alternative Investments For Beginners. Read up on other popular types of alternative investments: