Commodities, whether they are related to food, energy or metals, are an important part of everyday life. Anyone who drives a car can become significantly impacted by high crude oil prices. Anyone who eats might feel the impact of a drought on the soybean supply. Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities – either for the long term, or as a place to park cash during unusually volatile or bearish stock markets. (Commodities traditionally move in opposition to stocks.)
It used to be that the average investor did not invest in commodities because doing so required significant amounts of time, money and expertise. Today, though, there are a number of different routes to the commodity markets, and some of these routes make it easy for even non-professional traders to participate.
Basic economic principles of supply and demand typically drive the commodities markets: lower supply drives up demand, which equals higher prices, and vice versa.
Types of Commodities
Today, tradable commodities fall into the following categories:
- Metals (including gold, silver, platinum, palladium and copper)
- Energy (including crude oil, heating oil, natural gas and gasoline)
- Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)
Benefits of investing in commodities
- Diversified Investment Portfolio
- Transparency in the process
- Profitable Returns
- Protection against Inflation
- Trading on lower margin
Volatile or bearish stock markets typically find scared investors scrambling to transfer money to precious metals such as gold, which has historically been viewed as a reliable, dependable metal with conveyable value. Precious metals can also be used as a hedge against high inflation or periods of currency devaluation.