How To Invest In Commodities (2024)

Soaring energy and food prices have made the headlines in recent years.

Here’s a closer look at investing in commodities, including the different options for commodity-based investments.

What are commodities?

Commodities are natural resources or agricultural products that are grown, mined or processed and are critical inputs in the production of food, energy and clothing.

There are two main types of commodity:

• ‘Soft’ commodities that are grown or reared: livestock and meat, together with agricultural commodities, such as coffee, wheat, soybeans, cotton and corn
• ‘Hard’ commodities that are mined or extracted: energy products, such as crude oil, natural gas and coal, and precious and industrial metals, including gold, silver, palladium, copper, lithium and aluminium

Which commodities have delivered the highest returns?

Darius McDermott, managing director of advisory firm Chelsea Financial Services, said: “Commodities had a very good run in 2021 and 2022 on the back of supply chain disruption and rising prices.”

Mr McDermott pointed to the S&P GSCI (a broad-based index of 24 commodities) returning 42% in both of those years. The index came off somewhat in 2023, but he added that “it’s proven to have low correlation with the global equity market, underpinning its role in a wider portfolio.”

Let’s take a closer look at the top three commodities according to the most recently available annual returns:

Overall, a range of different commodities have cropped up in the top three. Precious metals dominated in 2020, while it was the turn of energy products in 2021 and industrial metals in 2022.

Scrutinising the performance of different commodities will help sharpen the focus on companies whose shares might do well on the back of this performance.

1. Precious metals

The lustre of gold shows no sign of fading for investors, with the shiny metal trading near its all-time high. High inflation, interest rates and geopolitical risk have pushed up demand for gold as a safe haven in times of uncertainty.

Indeed, investors buying gold in 1993 would have enjoyed a seven-fold price increase over the last 30 years, as show in the chart below:

That said, it’s been more of a mixed bag for silver and platinum, with prices heading largely downwards over the last decade

2. Industrial metals

Industrial metals are highly cyclical, meaning that prices fall in a recession as industrial demand decreases. However, battery-related metals are expected to be long-term ‘structural winners’ due to their importance in the storage of green energy.

Lithium has been one of the stellar performers, principally due to its use in electric vehicle (EV) batteries. Prices hit a record high in late 2022, thanks to a perfect storm of rising demand and supply constraints.

However, a slowdown in the Chinese EV market triggered a subsequent fall of over two-thirds in the price of lithium, as shown in the chart below:

For investors wanting to add lithium-oriented stocks to their portfolio, we’ve produced a guide to our pick of the best lithium stocks.

It’s been a similar story for palladium, a key raw material in emission-reducing devices for cars, with rising demand prompting a quadrupling in its price in the decade to March 2022.

However, its price has subsequently more than halved as supply constraints eased and car manufacturers switched to using cheaper platinum.

3. Energy products

Energy-based commodities also delivered substantial returns during and in the wake of the Covid-19 pandemic. The relaxation of lockdown restrictions, together with geopolitical supply issues, pushed oil and natural gas prices to near-record highs, as seen in the chart below (but note that energy prices have also fallen over the last six months):

How can you invest in commodities?

One option is to buy the commodity in physical form, although this comes with challenges in terms of storage and trading. Alternatively, investing in commodity-based shares and funds can provide indirect exposure to commodities.

Commodity funds and shares can be purchased via an investment platform, either in a general investment account, or a ‘tax-free wrapper’ such as an Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP).

We’ve researched the market to find our pick of the best commodity trading platforms, ISA providers and SIPP providers.

Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.

1. Buy commodity ETFs and ETCs

Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) are becoming increasingly popular and can offer a low cost way of investing in commodities. ETFs typically track the performance of a basket of investments or an index, while ETCs track commodity prices. As they’re traded on the stock market, you can buy and sell them ‘live’ as with shares.

According to Trustnet, there’s over 450 commodity-related exchange-traded products to choose from, with two main types:

• Commodity ETFs that either hold the commodities in physical form, or more usually, build a portfolio of futures contracts
• Commodity index ETFs that track the price of a single commodity index, such as crude oil or gas, or track a broader index such as precious metals, clean energy or agricultural products

Investing in ETFs can be a relatively low-cost way of tracking a commodity or index, typically charging annual fees of around 0.2%, compared to 0.8% to 1.0% for actively-managed funds. To put this in context, a £1,000 investment in a fund that charges 0.2% would cost £2, while a fund charging 1% would cost an investor £10.

According to Dzmitry Lipski, head of funds research at interactive investor, the following pair of commodity ETFs could be worth considering:

• WisdomTree Enhanced Commodity ETF:this ETF offers a broad exposure to energy, industrial and precious metals and agricultural products, with 16% held in gold. Mr Lipski says: “The fund is well positioned to benefit from the current market climate and potentially deliver higher real returns.”

• iShares Physical Gold ETF: this ETF aims to track the spot price of gold. Mr Lipski says: “Gold has performed well relative to equities and other risk assets during periods of extreme economic turbulence, market volatility and high inflation”. However, he recommends investors don’t invest more than 5% of their portfolio in gold.

iShares Physical Gold ETC (SGLN) price

2. Invest in commodity-based funds and investment trusts

Commodity-based funds and investment trusts pool money from investors to invest in a range of companies involved in the mining and production of commodities including agriculture, natural resources, clean energy and timber.

Chelsea Financial Services’ Darius McDermott suggested the following funds for investors potentially looking for exposure to commodities:

• BlackRock BGF World Mining Trust (BRWM): this investment trust invests in mining and metals companies. Mr McDermott points to its attractive dividend yield (calculated by dividing last year’s dividend payment by the current share price).

• TB Amati Strategic Metals: this fund, launched in 2021, invests in metals with strategic importance to the global economy and future macroeconomic trends including gold, copper, nickel, silver, and lithium.

• Barings Global Agriculture: this fund invests in companies in the agricultural sector, including machinery, processing and farming.

• VT Gravis Clean Energy Income: this fund invests in renewable and sustainable energy across a range of regions.

3. Buy shares in commodity-based companies

Another way to invest indirectly in commodities is to buy shares in companies that produce, mine or process commodities or related businesses.

Higher commodity prices allow companies to sell their products at a higher price – if production costs remain the same, this leads to an increase in profitability. However, share prices are also impacted by company-specific factors, together with broader geopolitical and environmental issues.

Mining companies

In the mining sector, Glencore (GLEN) is an Anglo-Swiss producer and miner of more than 60 commodities, including cobalt and nickel. Keith Bowman, investment analyst at interactive investor, said: “Exposure to commodities which assist decarbonisation and energy transition under climate change concerns continues to keep Glencore in the gaze of investors.”

Oil and gas companies

Looking at the oil and gas sector, Mr McDermott commented that: “While the world is looking to move away from oil and gas, these markets still have a role to play for some time to come.”

He believed that oil and gas companies such as BP (BP) and Shell (SHELL) would “play a role in the transition to cleaner energy as they look to increase their renewable footprint”.

BP share price

We’ve also taken a more detailed look at how to invest in natural gas and oil along with our pick of the best renewable energy stocks.

Agricultural companies

In the agricultural sector, Mr McDermott pointed to companies such as John Deere (DE) and Kubota (KUBTY) “developing technologies to modernise farming practices and using artificial intelligence to provide ‘precision agriculture’.”

These include the calibrated fertilisation and watering of crops to increase production, together with the use of “artificial intelligence to differentiate between cultivated plants and weeds”.

What is the outlook for commodities?

Commodity prices are expected to continue on a downward trend, with the World Bank forecasting that prices remain broadly stable in 2024 having fallen by about 20% a year earlier.

However, growing geopolitical tensions, stronger-than-anticipated growth in China and supply disruptions could yet trigger another rise in prices.

Looking longer term, commodities will play a key role in the transition to green energy to meet the ambitious net zero emissions targets set at the last COP 26 summit. Clean energy technology is heavily reliant on metals such as copper, lithium, nickel and cobalt to allow storage of energy in batteries.

Tilmann Galler, executive director at JP Morgan, anticipated that demand for critical minerals could surge over the next decade. He said: “The clean technology transition is igniting a new supercycle in critical commodities, with natural resource companies emerging as winners.”

And Mr McDermott believed that agriculture could be “perhaps the greatest long-term story of all.” With a predicted global population of nearly 10 billion in 20050, he pointed out: “Feeding the world is going to be a major task that will require significant long-term investment”.