Should you invest in commodities in 2024? Here’s how to go about it

Nick Sundich Nick Sundich, May 22, 2024

In this article, we look at why you may want to invest in commodities.

To cut to the chase, we think investors should consider to invest in commodities. It is an excellent way to diversify your portfolio and add a layer of protection against market volatility. But there are several different ways that individuals can invest in commodities, including both physical investments and financial instruments. We go over some of the ways to invest in commodities as well as some of the key risks.


How to invest in commodities

If you invest in a resources, energy or commodity stock (gold mining stocks for instance) on an exchange like the ASX, you are already investing in commodities, albeit indirectly. These companies’ fortunes will fluctuate substantially dependant on commodity prices. But what if you want go directly invest without the risk of a company running into the ground because of bad management?

One of the most common ways to invest in commodities is through futures contracts. Futures contracts allow investors to buy or sell assets at predetermined prices and at specific dates in the future. This type of investment is usually used to hedge against inflation or other market forces that can affect commodity prices. You can invest in them through dedicated metals exchanges like the London Metals Exchange (LME).


Exchange-traded funds

Another option for investing in commodities is through exchange-traded funds (ETFs). ETFs are investment funds that track a particular basket of commodities, such as gold or crude oil. ETFs provide investors with exposure to a range of commodities without the need to purchase or store physical assets. Some may provide exposure to a portfolio of companies. But it is important to do one’s homework, not just look at the name of an ETF and think they know it all.

Finally, it’s also possible for investors to buy and sell physical commodities themselves. This involves purchasing hard assets such as gold bars, coins, or other forms of precious metals. This type of investment requires careful research and knowledge of the markets in order to achieve the best returns.


The benefits of investing in commodities

Commodities provide stability and are often seen as a hedge against market volatility. In addition to providing stability and diversification, commodities also offer potential for growth. As the world economy continues to grow and develop, demand for certain commodities can increase, leading to higher prices for those items. For example, as global population grows and populations become more affluent, strong demand is created for oil and agricultural products which can result in increased returns on investments.

Investing in commodities can be an excellent way to diversify your portfolio and take advantage of potential growth opportunities. But, as with any investment, it’s important to have realistic expectations when investing in commodities and know the key risks.


Of course there’s risk too

The most important of these risks is that prices can fluctuate significantly and very suddenly. There are no guarantees of which way they will go no matter what analysts say. Commodity investments also come with certain tax implications that may be unique compared to other investments. For instance, gains from the sale of physical commodities might be taxed at a different rate than investments like equities and properties. Furthermore, it’s important to understand how international regulations may affect your investments in commodities traded on certain global exchanges – this includes (but is not limited to) tax laws.


Investing in commodities should be considered

If you invest in commodities you can diversify your portfolio and take advantage of potential growth opportunities. By doing your research and understanding the associated risks, you can build a balanced asset mix that fits your individual goals and risk tolerance. With the right strategy, commodities can help investors reach their financial objectives while providing stability and protection against market fluctuations.


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