Commodities are everyday things we use, like our morning tea, the metals in our phones, or the grains in our cereal. But they also play a big role in how we save and invest our money. Let’s dive into the world of commodities and see how their prices change and how they can help us make smart money choices.
Commodities: Everyday Things That Matter
Commodities are the basic things we need and use every day. At their core, commodities are raw materials or primary agricultural products that can be bought and sold. These range from metals like gold, silver, and copper to agricultural products like wheat, rice, and coffee. The smartphone in your hand, for instance, is a product of multiple commodities. The screen might be made using silica, the battery might contain lithium, and the circuits are often gold-plated. But the significance of commodities extends beyond just consumption. They are the backbone of various industries. For instance, the construction industry relies heavily on steel and cement, while the automotive industry depends on metals like aluminum and platinum. Furthermore, commodities play a pivotal role in the global financial landscape. They serve as essential assets in the trading world. Investors often include commodities in their portfolios to diversify or speculate on price movements.
Why Invest in Commodities?
Investing in commodities offers a unique opportunity for those looking to diversify their financial portfolios. They often behave differently than other ways we save or invest, making our money mix more varied. Their tangible nature sets them apart from other investment avenues like stocks or bonds, which are essentially financial contracts. They can also help protect our savings when prices of things go up. Financial markets can be unpredictable, with various assets reacting differently to global events. For instance, while the stock market might plummet during a geopolitical crisis, commodities like gold, often viewed as a ‘safe-haven’ asset, might see a surge in value. By having a mix of commodities in a portfolio, an investor can potentially offset losses in one asset class with gains in another.
Why Do Commodity Prices Change?
The main reason commodity prices go up or down is because of supply (how much there is) and demand (how much people want). Additionally, the strength or weakness of the dollar can have a direct impact on commodity prices. A strong U.S. dollar makes commodities more expensive for buyers using other currencies which can decrease demand and drive prices down. Conversely, a weaker dollar can make commodities cheaper and more attractive which may push prices up. Finally, The commodities market, like all markets, is susceptible to unexpected events, often termed “black swan” events. These can range from things like natural disasters to geopolitical tensions or trade wars.
When Supply Chains Get Disrupted
Sometimes, getting commodities from where they’re made to where they’re needed can be hard. This can be because of natural disasters, political issues, or even health crises like COVID-19. For example, when there were problems in Ukraine in 2022, it affected not just their country but also how other countries traded and used commodities. All of these scenarios can have an effect on commodity prices. If it becomes difficult to transport a commodity to a particular market then the pace of demand could outstrip the pace of supply driving the price up, and vice versa.
How to Get Started with Commodities
If you’re thinking about investing in commodities, there are a few ways to do it.
1. Investing in Commodity Companies:
Overview: One of the most straightforward ways to invest in commodities is by purchasing stocks of companies involved in their production or distribution.
Examples: This could include mining companies for metals like gold or copper, energy companies for oil and natural gas, or agricultural firms for crops like wheat or soybeans.
Pros: By investing in these companies, you indirectly benefit from the performance of the commodity. If the price of gold rises, for instance, a gold mining company might see increased profits.
Cons: However, company stocks are also influenced by factors unrelated to commodity prices, such as management decisions or broader market trends.
2. Commodity-focused Funds:
Overview: These are pooled investment vehicles that gather money from multiple investors to invest in commodities or commodity-related assets.
Examples: Mutual funds, exchange-traded funds (ETFs), and index funds that track a specific commodity or a basket of commodities.
Pros: These funds offer diversification since they invest in a range of assets related to a particular commodity. They’re also managed by professionals, which can be advantageous for those unfamiliar with the commodities market.
Cons: There might be management fees associated with these funds, and their performance is dependent on the expertise of the fund managers.
3. Futures Contracts:
Overview: Futures are standardized contracts to buy or sell a specific quantity of a commodity at a predetermined price on a set future date.
Examples: An investor might enter a futures contract agreeing to buy oil at a specific price three months from now.
Pros: Futures allow investors to profit from price movements without having to own the actual commodity. They also offer a high degree of leverage, meaning investors can control large positions with relatively small amounts of capital.
Cons: The leverage also means that the potential for losses is magnified. Futures are complex instruments and might not be suitable for beginners. They require a good understanding of the market and often necessitate active management.
To Wrap Up:
Commodities are more than just things we use every day. They play a big role in how we save and invest our money. If you’re thinking about investing in commodities, it’s important to learn as much as you can and think about what’s best for you.
