If you are new to investing, any smart expert will tell you about the need to diversify your investment portfolio rather than risk everything on one endeavor. You should not choose between secured vs. unsecured loan because the aforementioned strategy may help you achieve your investment targets and boost your returns.
Consumers can choose from a variety of investment vehicles, including currencies, mutual funds, stocks, and bonds. Besides, you may invest in commodities. Keep on reading to learn more about the pros and cons of this option.
What Are Commodities?
Let’s cover the basics. What are commodities, and why are they helpful for your investment portfolio? A commodity is something you can sell or purchase. It may be an agricultural product or a raw material. It is necessary to mention that commodities are interchangeable and can be replaced with other products or utilized for making other products.
For instance, wheat is a type of commodity. It can be sold or purchased on the market. It is grown by the farmers and maybe later sold to make bread. Demand and supply make the price of wheat fluctuate.
Hence, we can make a solution that commodities are connected to inflation and rise together with it. Gold, silver, and oil are also commodities. Consumers can rely on these things in their everyday lives. Market conditions change the prices for these commodities.
As a result of issues with supply chains, rising inflation, or a war, the price of commodities can go up. It may offer some protection against inflation rates if you invest in some commodities, as their prices will increase at similar rates.
Generally, you will face the same risks as with any investment. The value of your commodities may decrease and increase, so you need to do some research to minimize the risks.
Examples of Commodities Worth Investing in
The Monthly Economic Letter by BDC states that commodity prices have lowered in recent months against a backcloth of slower economic development. Interest rates are raised by central banks in many countries to fight against inflation. In August 2022, the commodity price index was about 200. Generally, the Canadian stock market is weighted with commodity producers.
Here are some examples of commodities worth investing in:
- Oil. It is considered the source of primary energy these days. It gets refined into different products like plastics, gasoline, and fertilizers. This type of commodity relies on supply fluctuations and global demand. If supply is low and demand goes up, the price of oil rises.
- Gold. It is typically used not for useful needs but as a store of value. Gold can be used in technology spheres and jewelry. It can be a great inflation hedge to have gold bullion as it increases its value even when inflation gets higher. You may want to purchase gold bullion or coins.
- Grain. It is hard to predict the weather and the crop output worldwide. On the other hand, this commodity isn’t affected by the recession and other economic problems. People will always need to eat. Yet, geopolitics may influence this commodity, as we can see this year with the current war in Ukraine. According to the Government of Canada, the agriculture and agri-food sector is an important contributors to the Canadian economy. In 2021, the agri-food system generated $134.9 billion of the country’s gross domestic product.
- Lumber. Housing markets influence the demand for lumber. The interest rates can influence the housing markets as well. The perennial softwood lumber trade between Canada and the USA may often affect interest rates and lead to smaller demand and supply.
- Critical minerals. There are many critical minerals, including cobalt, lithium, copper, and rare earth minerals. Investors have been recently very excited about this investment option. As our planet changes its energy sources to renewables, we will need more and more of these commodities. Some experts predict that the production of critical minerals will go up 10 times and more. Yet, their prices are quite volatile today.
Benefits and Downsides of Investing in Commodities
Commodities present an alternative class of valuable assets. They may be really helpful for investors who want to diversify their portfolio or get a hedge against the rates of inflation.
Silver, gold, oil, and wheat are some of the most common examples of commodities to choose from. This investment option may offer a decent alternative for people willing to do something different, as many classes of assets were down in 2022.
Here are some of the advantages of choosing commodities for your investment portfolio:
- Inflation hedge. This type of investment may offer protection from inflation. For instance, if you purchase gold, you will be able to sell it later for a higher price when inflation gets higher.
- Diversification. Regular investments like mutual funds or stocks won’t provide different returns. The commodities offer the diversification, and these investments may offset your loss.
- Great returns. Prices of commodities may differ as the economy changes. There may also be ups and downs. For instance, the increasing demand and problems with the supply chain led to sky-high oil prices.
On the other hand, there are some drawbacks to investing in commodities.
- Asset concentration. Although you may utilize commodities to diversify your investment portfolio, it’s not very simple. If a commodity invests just in one or two industries, it’s called non-diversified.
- Volatility. Trends in supply, global demand, and technological changes impact the commodities market. If renewable energy options become cheaper with the help of technology, the prices will lower as oil demand decreases. If supply goes up, the commodity prices will lower.
The Bottom Line
The majority of investors opt for conventional options like mutual funds or the stock market. However, there are more alternatives to choose from. You may select commodities to invest in and diversify your investment portfolio.
This option has several benefits, including protections against inflation and lucrative returns. Evaluate this solution’s pros and cons before investing in commodities.
