Beginning your Journey into Commodities Investment
Investing in commodities involves buying physical assets. These can include crude oil, gold, base metals and other desirable items such as wheat or sugar. They are a way for you to add diversification to a portfolio. In this article, we discuss the basics of commodities investment.
Traditional asset classes can be volatile and as a clued-in investor, you need to diversify. One way to do this is through commodities, such as gold, oil and natural gas. As well as the physical product, you can also invest in their discovery and production through mining and exploration. Below, we give the key details you need to begin your journey into commodities investment.
The advantages of investing in commodities
Commodities have several advantages over other investment methods which you may consider.
You can minimize volatility
The supply and demand of commodities are impacted by events that do not affect other traditional investment values. These could include production, politics, weather and natural disasters. Thus, the rise and fall of their value are independent. This can provide more diversification in your portfolio and reduce volatility.
They can be physical
Unlike many other forms of investment like stocks and shares, commodities are physical items. While you can buy into them, some, such as gold, can be held at home in your safe. As demand rises, so does the price until you are ready to sell.
Hedge against inflation
Commodity prices tend to follow inflation. When commodities such as oil and gold prices rise, it impacts several different investment types. Commodities can work against this, as they become more in demand and value rises.
Commodities trading strategies
When trading commodities, many investors like to have a trading strategy. You may wish to try this out with paper accounts beforehand, so you can decide which one works best for you.
Moving Averages
Moving averages is a popular strategy. It involves taking an asset’s prices over a specific time and adding them together. This gives a much better idea of the market trend, as it removes the quick peaks and troughs that naturally occur.This data can then provide entry and exit points for investors like yourself.
Similar to this, and a very helpful tool, is the stochastic oscillator. This was developed in the fifties and is used to predict trends and reversals based on a mean price level.
Fundamental trading
Fundamental trading is a good tactic if you have your finger on the pulse of current news events. It involves buying based on things happening in the world. For example, if war breaks out in a major oil-producing country, you can predict demand will rise and so will the price. Thus, an investor would take advantage and hold a position.
The most common commodities to invest in
There are hundreds of commodities you can invest in. Below are the most common ones people will trade-in.
Oil
Oil is generally bought as crude oil, which is the unrefined version found immediately after it is pumped. It is then refined into various types of oil, such as aviation fuel, domestic gasoline and the oil used in manufacturing. Thus, the price of crude oil impacts a variety of different areas.
In turn, the price of crude oil is impacted by supply and demand. If a port blockade stops oil from coming into Europe, then oil prices will rise. If supply is plentiful and coming in easily, then it will fall. Should certain countries start to develop manufacturing capabilities and need oil for it, this can also increase demand and push up prices.
Gold
Gold has always been a desirable substance. It is held by national banks, is used in jewellery and is also in demand for manufacturing. Thus, gold is a desirable substance in many different fields. As it is a physical asset that holds value, many people want it for stability. If a country’s currency devalues and paper money becomes worthless, then gold is the first item that people want.
There are different ways to invest in gold. You can buy it outright and hold it yourself, or buy into it through a futures contract. You can also buy into companies involved in the process of gold manufacturing, such as mining corporations.
Other Metals
There are plenty of precious metals other than gold, including aluminium, zinc, copper and a host of others. They come under the moniker of base metals. You are probably using a variety of these metals now in your electronic device, and they are the backbone of everything from your car to the materials your house is built with.
All of these are relatively cheap and are plentiful. Thus, prices did tend to stay stable. However, that has changed in recent years as several emerging economies have increased demand and prices are often on the rise.
Commodities are one way to diversify and offer a little more stability. All investments come with a risk. You should do your research and only invest that which you can afford to lose. With a good strategy, you may just yield a healthy profit.
