Are commodities a good long-term investment?
Commodities are a hedge against inflation, so buying before periods of high inflation is a good investment strategy; however, predicting when inflation will occur can be tough. A commodity should be viewed as any other investment, taking into consideration an investor's time horizon and risk profile.
Past performance is no guarantee of future results. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.
Con: Commodities don't produce income for investors.
Some investments like stocks, bonds, and real estate produce regular income for investors through dividends or rental income, but commodities do not produce income for investors unless they're sold and a profit is realized from that sale.
Because the supply and demand characteristics change frequently, volatility in commodities tends to be higher than for stocks, bonds, and other types of assets. Some commodities show more stability than others, such as gold, which also serves as a reserve asset for central banks to buffer against volatility.
Energy products: Energy commodities like oil and natural gas are often considered to be good investments against inflation. Agricultural products: Food prices tend to rise during times of inflation, making agricultural commodities like wheat, corn and soybeans attractive investments.
Three of the most commonly traded commodities include oil, gold, and base metals.
Commodities don't do well in recessions
By contrast, gold has tended to shine during recessions as investors have reached for their safe-haven status. At the same time, the loosening of monetary policy and lower real interest rates has typically supported gold prices during economic downturns.
Commodities stand to benefit from underinvestment and the clean energy transition. PIMCO has a positive outlook for commodities based on supply constraints, the transition to a net-zero economy, and their historical correlation with inflation.
Commodity-dependent countries often grapple with issues like slow productivity, income volatility, overvalued exchange rates, and increased economic and political instability.
However, commodity money also has its disadvantages. One disadvantage is that the value of the commodity can be volatile, which can lead to fluctuations in the value of the currency. Another disadvantage is that it can be difficult to transport and store, especially in large quantities.
What is the safest asset to own?
- Understanding risk, including the risks involved in investing in the major asset classes, is important research for any investor.
- Generally, CDs, savings accounts, cash, U.S. Savings Bonds and U.S. Treasury bills are the safest options, but they also offer the least in terms of profits.
Silver is one of the most popular goods, right after gold. Silver is a great investment because it has been used as money and a way to store wealth for a long time. Silver is also used to make tools and jewelry that are very valuable.
- Options. An option allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. ...
- Futures. ...
- Oil and Gas Exploratory Drilling. ...
- Limited Partnerships. ...
- Penny Stocks. ...
- Alternative Investments. ...
- High-Yield Bonds. ...
- Leveraged ETFs.
Commodities (Non-Gold)
An investment in commodities can be one of the most powerful inflation hedges. Raw materials and agricultural products can be traded like securities. Commodities traders commonly buy and sell oil, natural gas, grain, beef and coffee, among others.
Inflation is most damaging to the value of fixed-rate debt securities because it devalues interest rate payments as well repayments of principal. If the inflation rate exceeds the interest rate, lenders are, in effect, losing money after adjusting for inflation.
Investors can help reduce risk, hedge against inflation and diversify their portfolio by investing in commodities, such as gold, silver and copper. Investors are regularly searching for ways to maximize returns while minimizing risk. One often overlooked avenue for achieving this balance is investing in commodities.
You might be shocked to learn that commodities can be used as a long-term investment. Consider the following examples. In 1971, gold saw its first major rise. Gold rose from $30 per ounce to $900 per ounce between 1971 and 1979.
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
The downsides to commodity investing are a lack of income, high volatility, and external risks. Lack of income: Investing in commodities doesn't generate yield income like a bond or a dividend-paying stock. All of the return on a commodities investment depends on correctly predicting the price movements.
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
Is cash king during a recession?
The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.
Saving Accounts
Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad. Other advantages of savings accounts include: Simple to open and maintain. Deposits are fully insured.
You can also profit off commodities by using futures contracts, which is an agreement to buy or sell a commodity at a specific price and date. You can make a lot of money through futures contracts if you're right about the underlying commodity price, but you can lose a lot too.
| ETF (ticker) | Expense ratio |
|---|---|
| iShares Gold Trust (IAU) | 0.25% |
| Abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free Fund (BCD) | 0.30% |
| United States Oil Fund, LP (USO) | 0.60% |
| Abrdn Physical Precious Metals Basket Shares ETF (GLTR) | 0.60% |
Usually, trading in the commodity market is suitable for a shorter time horizon since most transactions are executed through a futures contract. It's suitable for both short and long-term investment objectives. Individuals can park their funds for a day, a month, a year, or even 10 years.
