Introduction
Welcome to our guide on investing in commodities, a crucial yet often overlooked asset class. Metals like copper are increasingly vital in today’s economy. This article explains the dynamics of the commodities market, the opportunities it offers, and how to incorporate commodities into your investment portfolio.
For those who prefer selecting individual stocks, it is crucial to first understand what type of investor you are. To help with this, we have created three articles summarizing the three main types of investors: Value Investors, Growth Investors, and GARP Investors. Additionally, for those interested in passive investment strategies over a very long term (20-30 years), our guide on building a robust ETF portfolio offers comprehensive insights.
The Resurgence of Commodities
In recent times, the prices of refined petroleum products, copper, gold and cocoa have surged, highlighting the renewed interest and volatility in the commodities market. The instability of commodity prices has reemerged due to various global factors, including geopolitical conflicts and weather conditions disrupting supply chains. Furthermore, protectionist regulations in the U.S. and Europe aim to limit China’s dominance in strategic and critical materials, intensifying the “commodity wars.”
Copper: The Metal of the Future
Copper has been used for thousands of years and is second only to silver in conductivity. It is vital for various modern applications:
- Data centers require between 25 and 75 tonnes of copper per megawatt.
- Electric vehicles use 4 to 6 times more copper than traditional vehicles.
- Renewable energy systems use 8 times more metals than thermal power plants.
As countries like India, Pakistan, Nigeria, and Indonesia urbanize and industrialize, the demand for copper is expected to rise significantly. However, mining companies are hesitant to invest in new mines, preferring dividends, stock buybacks, or mergers. Analysts predict that by 2032, we will need to produce 9 million tonnes more copper per year than we do today, necessitating higher copper prices to incentivize new projects.
The Role of Gold and Silver in Your Portfolio
Gold has been a store of value for thousands of years, often used to preserve wealth. Gold’s durability, resistance to corrosion, and rarity make it a solid investment. A piece of advice passed down through generations is that owning gold can hedge against inflation and currency devaluation. For example, a gold coin (like a “Napoleon”) has historically maintained its purchasing power over decades.
Investing in gold can be done through physical gold, ETFs, or even digital gold tokens like PaxosGold or VeraOne. Each method has its pros and cons, and it’s crucial to consider storage and security.
Silver, often considered gold’s lesser-known sibling, also has significant investment potential. Historically, silver has been used as currency and remains popular among investors. The gold-to-silver ratio can indicate whether silver is undervalued compared to gold, making it an attractive investment when the ratio is high.
For those interested in purchasing gold or silver, one of the world’s largest suppliers, BullionByPost, offers an easy and reliable option. You can easily sell your coins back when needed. Additionally, by purchasing through the following link and spending over €700, you will receive a gift of €300 worth of silver: BullionByPost.
By diversifying your portfolio with precious metals like gold and silver, you can protect your wealth and potentially benefit from their historical stability and value retention.
Investing in Commodities
The recent surge in commodity prices underscores the importance of considering commodities in your investment strategy. During periods of economic uncertainty, commodities like real estate, gold, and other materials tend to appreciate, offering a hedge against inflation and currency devaluation.
How Commodities Influence the Economy
Commodities play a crucial role in the global economy, and their prices can have significant impacts. For instance, between 1973 and 1983, oil shocks led to stagflation, where economic growth was negative, and inflation was high. During such times, real assets like real estate, gold, and commodities outperformed financial assets.
Direct Investment in Commodities
Investing directly in commodities involves understanding the supply and demand dynamics:
- Supply is created by extraction and refining companies.
- Demand comes from industrial and food companies that need these raw materials to produce finished goods.
The vital nature of commodities can lead to sharp price increases during shortages. Conversely, in times of economic downturn, prices are set by the most profitable producers, often resulting in lower prices once less profitable producers exit the market.
How to Invest in Commodities
- ETFs (Exchange-Traded Funds): ETFs provide an easy way to gain exposure to commodities without directly buying the physical materials. They can track the price of a single commodity or a basket of commodities.
- Futures and CFDs: These financial instruments allow you to speculate on the price movements of commodities. However, they come with risks such as value destruction over time due to carrying costs.
- Stocks of Commodity Producers: Investing in companies that produce commodities, like mining companies, can provide exposure to commodity prices. However, these stocks also carry specific risks related to production, governance, and regulatory issues.
The Role of Financial Markets
Traditional financial markets (stocks and bonds) are designed to match funding needs with excess savings, offering returns based on time and risk. However, commodities markets focus on balancing supply and demand, often using futures contracts to hedge price risks.
Recommended Commodity ETFs
To gain broad exposure to commodities, consider the following ETFs:
- iShares Diversified Commodity Swap ETF: This ETF tracks the Bloomberg Commodity Index, providing exposure to a wide range of commodities, including energy, agricultural products, rare metals, and industrial metals. It is available on platforms like Trade Republic.
However, there are better options than ETFs or individual stocks. It is possible to directly purchase commodities through brokers such as Trade Republic, IBKR, and Revolut, though this remains risky. To help you manage this, we offer access to our dedicated investment portfolio, updated monthly to help you adapt, balance, and reevaluate your commodity investments. You can access it via the following link: Investment Portfolios.
Framework for Commodity Investing
To effectively invest in commodities, start by understanding the market dynamics, including the influence of supply and demand, geopolitical events, and economic indicators. Define your investment goals, whether to diversify your portfolio, hedge against inflation, or speculate on price movements, and select commodities that align with these objectives, such as energy, metals, agricultural products, and livestock.
Choose the appropriate investment vehicle, such as direct investments, commodity ETFs, futures contracts, commodity stocks, or mutual funds. Perform fundamental analysis to evaluate factors affecting commodity prices, and use technical analysis tools to identify price trends and entry/exit points.
Implement risk management strategies, including diversification, position sizing, stop-loss orders, and hedging. Finally, regularly monitor and adjust your portfolio based on market conditions and new information.
For more technical and precise frameworks (quantitative, qualitative, technical, fundamental), readers can explore our other articles and the recommended book at the end of this article.
Conclusion
Investing in commodities can be a valuable part of your investment strategy, offering diversification and protection against inflation. Whether through ETFs, futures, or stocks of commodity producers, understanding the specifics of this market is crucial. Always ensure to diversify your portfolio and consider new active management strategies in specialized funds without allocating more than 10% of your portfolio to commodities.
For those interested in starting their investment journey, consider using our affiliate link for Trade Republic. By using this link, you will receive a €10 bonus in shares as a gift: Trade Republic.
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For those interested in delving deeper into the art of finding market gems and mastering the best decision-making processes used by top portfolio managers, I highly recommend this book: The Art of Unearthing Gems in the Stock Market. This resource is perfect for investors of all levels and offers in-depth insights into proven strategies for achieving true success in the stock market. Please note that this is an affiliate link, and I will earn a commission if you purchase the book through it.
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