2022 is proving to be a peculiar year: stocks are lagging (if not on the downside), inflation has peaked like it hasn’t happened in 40 years, bonds are still low and so are cryptocurrencies they are not doing great.
All these reasons are leading many investors to look for alternative investments that can strengthen their portfolios.
What are these alternative investments?
These are raw materials, i.e. real goods.
But should we invest lightly in raw materials?
No, since commodities also have critical issues that need to be kept in mind:
- Volatility: Commodities are well known for being highly volatile assets;
- Prices: are highly cyclical, they rise and fall with demand expectations;
- The problems: commodity markets are currently in balance, but the war in Ukraine is inevitably creating supply uncertainty and Chinese blocs are worrying global economic growth.
Two types of commodities
- Commodities are raw materials that are used to produce other goods; they can be bought and sold.
- In the world of investments, they are an asset class that is traded on the financial markets like shares or bonds.
- Commodities are divided into two types, soft and hard.
- Now let’s see their features in detail.
Soft Commodities
The so-called soft raw materials are raw materials that are grown: we are therefore talking about coffee, wheat, sugar, cotton, but also livestock.
Soft commodities play a very important role, especially in the futures market. They are also used by farmers who wish to lock in future prices for their crops and by commercial buyers of produce.
Speculative investors who are looking for a profit also often trade in this market.
Hard Commodities
Hard raw materials, on the other hand, are those that are extracted: we are therefore talking about gold, silver, oil, and other metallic minerals.
They are therefore mainly made up of natural resources, and they are also the economic health of a country, given that the global demand for these resources can also be monitored to evaluate the stability of an economy.
How to invest in commodities?
- Commodity investing comes in several forms.
- Let’s start with the simplest: it is possible to invest directly in commodities, such as physical gold, corn, or wheat.
- Instead, let’s see three other ways of investing.
Commodity stocks
Let’s start with the simplest and most immediate way.
- To get exposure to commodities you can buy shares of commodities-related companies such as oil stocks, gold mining stocks, or agricultural stocks.
- This is a simple and indirect way to get involved in commodity investing.
- What’s the risk? The risk is that share prices are affected by the operating performance of companies, and not just by changes in commodity prices.
How do you materially invest in commodity stocks?
The most immediate way is to invest in companies that have strong business models and generate profits: we can name the Rio Tinto Group, the Anglo-Australian global mining company, the third largest mining company in the world, and the gold Barrick Gold Corp.
