Why not to invest in commodities?
Things to be aware of when investing in commodities
High volatility.
Although the price of raw materials depends on supply and demand, both supply and demand are affected by external factors such as natural phenomena or political circ*mstances that abruptly alter the prices of raw materials.
Investing in commodities can provide investors with diversification, a hedge against inflation, and excess positive returns. Investors may experience volatility when their investments track a single commodity or one sector of the economy. Supply, demand, and geopolitics all affect commodity prices.
Commodity-dependent countries often grapple with issues like slow productivity, income volatility, overvalued exchange rates, and increased economic and political instability.
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.
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.
Stock markets are considered risky investments. However, compared to commodity markets, they are said to be less risky since stock investing is more long-term.
If you invest in a broad commodity ETF, it may include some of the following types of commodities: Oil. Wheat. Gold.
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.
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.
Are commodities a risky investment?
Uncontrollable factors such as inflation, weather, political unrest, foreign events, new technologies and even rumors can have devastating consequences to the price of a commodity.
Commodity funds have historically provided investors with an opportunity for diversification, downside protection and upside potential. However, as with all types of investment, commodity funds carry risk, and may not be right for every portfolio.
Commodity price risk is the chance that commodity prices will change in a way that causes economic losses. Commodity price risk for buyers is due to increases in commodity prices; for sellers/producers it is often due to decreases in commodity prices.
A long-running debate in asset allocation circles is how much of a portfolio an investor should allocate to commodities. Conventional wisdom often dictates that the ideal percentage is 5% to 10%.
Lack of trading discipline
This is the primary reason for intraday trading losses in the intraday trading app. Trading discipline has to focus on three things. Firstly, there must be a trading book to guide your daily trading. Secondly, you must always trade with a stop loss only.
Popular commodities for investment
According to Bob Minter, director of ETF investment strategy at abrdn, a global asset management company, the top-five most popular commodities are oil, natural gas, gold, silver and copper.
If the amount of the commodity in circulation changes the value of the money changes. Commodity money is also harder to use than any other type of money. It is less liquid, easily converted, and involves much more effort for people to trade freely.
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
Commodity money is known to have volatility risk. Its value is affected by supply and demand. For instance, if oil is used as money, its value will increase significantly when there is a natural event that disrupts its supply. Also, when the demand for oil goes down, its value will fall.
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.
What commodities to invest in in 2024?
| 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% |
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.
The most traded commodity is crude oil. Crude oil is used in many products, from petrochemicals to petroleum to lubricants to diesel.
What About Crude Oil? Crude oil is by far the biggest commodity market, and oil prices were the talk of the town for much of 2022.
Crude oil ranks as one of the most traded commodities in the world. Commodity traders who had taken long positions on crude oil last year made a lot of money. Crude oil prices decreased in 2020 as a result of COVID-19 and the consequent global lockdowns. However, the rate of immunisations increased in 2021.
