The commodities markets have been booming since the first year of the pandemic – and some experts predict that they could continue thriving for a decade or more to come. Limited spare capacity and low inventories mean that even if some commodity cost pressures decrease, prices will remain higher than those seen in past recessions.
If you’re considering investing for the first time in 2023 or diversifying an existing portfolio, commodities could be a (nearly) safe bet.
What are Commodities?
A commodity, in commerce, is a basic good that’s interchangeable with other goods of the same kind. Investors can choose to buy and sell commodities directly in the cash (spot) market or through derivatives such as options and futures. Hard commodities are metals and energy products like gold, silver, and crude oil, while the term soft commodities usually refers to agricultural goods, including wheat, coffee, soybeans, and sugar.
Basically, a commodity is a raw input that’s used to produce goods. The key feature of a commodity is that there’s extremely little differentiation in the particular good, no matter who produces it.
How to Invest in Commodities?
There are three main means of investing in commodities. The first is to invest in the physical product itself – in this case, it’s advisable to, for example, research the best place to buy silver or gold to ensure you’re getting the best value for money possible. It’s important, however, to consider issues such as storage and future trading if you’re considering this option.
Secondly, you could invest in commodity shares or funds, which can be purchased via a general investment account, or an investment platform. Exchanged Traded Funds (ETFs) and Exchange Traded Commodities (ETC) offer low-cost, popular ways to invest in the commodity market. The former usually tracks the performance of an index or collection of investments, while the latter tends to track commodity prices.
Finally, you may wish to purchase shares directly in commodity-based companies, such as those businesses that mine, produce, or process commodities. To this end, an investor could consider investing in oil and gas companies, mining companies, or agricultural companies.
Why Commodities Make a Good Hedging Bet in 2023
Investing in commodities is generally seen as a great way to ‘hedge your bets’ – and given that they make a particularly good investment in times of high inflation and economic volatility, 2023 could be the perfect time to get involved in the market.
Commodity investments provide a buffer against the negative effects of inflation, which effectively reduces the ‘real’ value of currency over time. In terms of historical patterns, commodity returns tend to increase when inflation is running high.
They’re also an effective means of diversifying an investment portfolio, which offers some protection should one asset class in the portfolio underperform. This can help smooth the portfolio’s overall potential volatility.
What are the Risks of Investing in Commodities?
A lack of income is the most common risk that comes with investing in commodities – returns are entirely dependent on correctly predicting the market’s price movements. Global events can also have a ripple effect that can shift market dynamics significantly, which may have a major impact on commodity returns. Finally, external risks are always present when it comes to commodities; regional conflicts, climate events, and political situations can affect, for example, a business’s supply chain and ultimately impact commodity prices.
Which Commodities Deliver the Highest Returns to Investors?
While the nature of investment always entails something of a gamble, it’s helpful to look at some of the commodities that have performed best for investors over the last few years. Lithium delivered the highest returns to investors in 2021 and 2022, with coal and crude oil in second and third place in 2021 and nickel and gas in those positions in 2022.
In general, energy products delivered the highest returns overall in 2021, while industrial metals took the lead in 2022. Precious metals, too, continue to be a good investment in 2023, with high-interest rates, inflation, and geopolitical risks pushing up demand for gold particularly.
Commodities as a ‘Safe’ Investment in 2023: The Takeaway
While, inherently, no investment can be considered a totally ‘safe’ one, commodity investment may be as close as it gets! Commodities can provide a buffer against inflation and help maintain your investment’s ‘real world’ value. Whether you’re a long-time investor seeking to diversify your portfolio or are considering investing for the first time and wondering into which market you should put your funds in, commodities could be the answer.