You can invest in Commodities in more than one way and with many products. There are futures contracts, exchange-traded vehicles, and mutual funds. One of the advantages of commodities is the variety of products offered. Agriculture, natural resources, precious metals, and animals are all viable investment options. You can also simply purchase physical raw commodities, such as gold or silver.

The Key Takeaways

• Commodity prices typically track inflation, making them desirable to investors wanting to diversify their portfolios. However, commodity returns are often uncertain.
• There are numerous ways to invest in commodities, ranging from actual ownership to mutual funds and alternative investments such as hedge funds.

Investors seeking to diversify their portfolios beyond the more traditional asset classes of equities and bonds will occasionally turn to commodities.

Historically, commodities have performed differently than the stock and bond markets. “From a tactical standpoint, commodities can provide opportunities from time to time,” says Rob Haworth, senior investment strategy director at US Bank Wealth Management. “This is best in circumstances where a broad Commodity complex is in short supply, driving up prices.” The spike in energy costs from 2021 to 2022 highlights the consequences of a supply-demand imbalance.

Why invest in commodities

• Commodities may minimize portfolio volatility. Weather, politics, and global production can all have an impact on commodity returns, hence there has been little historical link between commodities and traditional investments. As a result, commodity returns may contribute to lower volatility in a diversified portfolio.
• Commodities can be a hedge against inflation. Commodity prices frequently track inflation and may provide a buffer against the effects of rising prices. Find out how inflation affects investing.
• Commodities can be physical assets. Hard commodities, such as gold, may be used as a store of value. This is especially true when a baseline amount of demand exists. As demand increases, prices may climb.

How to invest in commodities

Commodities are available in a variety of forms for investing purposes. Some can be as complicated as owning physical commodities directly, while others are as simple as acquiring a commodity-focused mutual fund.

• Physical ownership. This is the simplest approach to investing in commodities. However, unless these assets are compact and transportable, such as precious metals, they may be impracticable. Individual investors cannot afford or want to store bales of cotton or barrels of frozen orange juice concentrate. Owning these commodities is usually best left to those who will convert them into final products.
• Futures contracts. Futures contracts were created to allow farmers to set a price for future delivery of goods. These contracts are likely the best-known way to invest in commodities. Futures contracts feature price-mechanism transparency, and you can purchase a commodities futures contract for a fraction of its value, but there are hazards. Purchasing and selling futures contracts needs expertise and experience. If the forward price, or what you paid for the contract, is greater than the spot price when the contract expires, you will lose money.
• Individual securities. Shares in commodity-producing companies give you indirect access to the commodities markets. If the commodity’s price rises, companies that produce it may see an increase in sales and profits. “If someone invests in stocks of oil companies, there tends to be a relationship to oil price trends over time, but sometimes there is a disconnect,” Haworth said. This is one limitation of using individual equities to diversify into commodities.
• Mutual funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs). These securities can provide you with broad exposure at relatively low investment minimums. Funds might focus on a single commodity, such as gold or precious metals, or they can cover a wide range of commodities. “Funds are invested in futures contracts and don’t own physical commodities,” Haworth said.
• Alternative investments. Hedge funds or private investments specializing in commodities are one alternative. These are highly speculative and leveraged investing methods with significant levels of risk and volatility. Enhanced profits are possible, but success is not guaranteed. Before pursuing this course of action, consult with a financial professional. Learn more about the two sorts of alternative investments.
  

Common commodities terminology

If you are considering investing in commodities, it is important to understand the terms of the deal. Here are some major phrases used in commodity trading.

• Commodity:  Gold, oil, wheat, cattle, and aluminum are examples of raw resources and unprocessed items that can be eaten directly or processed and resold.
• Forward price:  In a forward contract, the agreed-upon price of an asset is determined now, but delivery and payment will take place later.
• Futures: An exchange-traded derivative. A future is an obligation to acquire or sell an underlying asset in the future at a defined price.
• Index performance: Most commodities ETFs, ETNs, and mutual funds follow a commodity index, such as the S&P GSCI. Investors should be aware that indexes do not necessarily correspond with spot prices for certain commodities.
• Spot price: The price stated for prompt payment and delivery of a particular commodity. This price is exclusively for delivery.

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What Do You Need to Open a Commodities Investing Account?

Opening a commodities investment account is the same as opening a traditional brokerage account. If you only want to invest in commodities through firms and funds, you may simply open a conventional brokerage account because these two investment classes do not require anything extra. If you plan to trade futures and options, you must first establish that your broker offers these choices. Then you’ll normally have to make some further disclosures to ensure you understand the dangers and have enough capital to not lose it all in one deal.

What You Need to Open a Brokerage Account 

To open a brokerage account, you must give some personal and financial information and answer some simple questions.

Personal Information

• Name, address, and telephone number
• Tax identification number (usually your Social Security number)
• Date of birth and government ID
• Banking information for funding the account
• Level of investment experience and risk tolerance (the know your client (KYC) questions)

With online brokerages, the initial step is normally to create an account (email and password) with the broker, and then give further information as part of the onboarding process.

Minimum Deposits

While many brokerage accounts have no account minimums, enabling futures trading in a margin account often requires at least a few thousand dollars held with the broker. Depending on the contracts you want to trade, the actual amount of money required to trade will be greater than the minimum deposit required to activate the account. The account type may affect both the initial and maintenance margins for future accounts.

What You Need to Open a Gold IRA

Gold individual retirement accounts (IRAs) are a sort of commodity investment for retirement. Unlike a traditional IRA, you will need to hire a custodian to store the physical assets. To set up a gold IRA, first open a self-directed IRA, then choose a custodian to administer the account, an approved depository to hold the gold, and a broker/dealer to purchase the gold through. Some gold IRA providers incorporate these services or link consumers to providers in their network.

Personal Information

• Name, address, and telephone number
• Tax identification number (usually your Social Security number)
• Date of birth and government ID
• Additional KYC questions

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