This article looks at the hot topics of commodities investment and investigates suitable ways to get involved in this fast-paced, rewarding industry as an investor.
Commodities have become a hot topic since the credit crunch of 2008 and subsequent economic problems. Commodity pricing models and trends have shown soaring trade figures in this period, with commodity prices rocketing, whilst other asset classes – such as bonds, stocks and property – faltered. One of the most popular commodities, gold, has hit record breaking prices consistently since and the price of Brent oil barrels also consistently sat above $100 per unit.
1. Why the interest?
When looking at commodity pricing, it helps to understand the wider market drivers that affect this particular market. The rise in domestic inflation and the ongoing volatility of the stock market have been two primary factors which have driven UK investors towards tangible asset classes. Commodities follow the same economics rules as any other asset, in that they are affected by the basic macroeconomic laws of supply & demand. When demand increases – such as with gold, prices rise. When supply falls, such as with oil – due to ongoing peace problems in the middle east – prices will also steadily increase. So supply and demand factors can both have an impact on the resulting cost; a phenomenon which is perceived through comparative analysis of commodity pricing.
2. What is a commodity
When looking at commodity pricing, it helps to understand at a fundamental level, what a commodity is exactly. Essentially, it is a physical asset and can include silver, gold, gas, oil and even ‘soft’ commodity groupings such as cocoa beans, sugar and wheat. These are viewed as being safe investment classes for many investors, as they preserve the wealth of individuals and corporations in a physical way. They are also regularly known as the fifth asset class, following on from cash, equities, fixed interest products and real estate.
3. A fluctuating asset class
This sector follows its own course and often bears little correlation to the fortunes of the stock and currency markets. This means that if equity markets are turbulent, commodity pricing may not mirror this necessarily, In fact, commodities markets will generally behave in a different way to more conventional asset classes, which offers excellent diversification potential to those with a broad asset portfolio and a desire to spread their risk. Prices in the commodities market have soared over the past decade, thanks to the success of the emerging markets.
4. Hot trends
Key commodities in investor’s portfolios today include precious metals, particularly gold, but with platinum and silver also showing gains. Food and manufacturing related commodities are also popular and countries such as China, with their rocketing populations and rising middle classes, mean that dairy and beef commodity prices are also soaring.
5. How to invest
You can either physically buy a commodity – such as gold bullion, buy shares directly in a commodity company, or indirectly invest via an investment trust or fund. Another indirect route is to buy shares in a commodity company, such as gas and oil producers.
Smith is a specialist in comparative analysis of commodity pricing and advises new investors on the commodities market. He also contributes regularly to a range of trade magazines and blogs.