The Forbes Advisor editorial team is independent and objective. To help support our reporting work, and to continue our ability to provide this content for free to our readers, we receive payment from the companies that advertise on the Forbes Advisor site. This comes from two main sources.
First, we provide paid placements to advertisers to present their offers. The payments we receive for those placements affects how and where advertisers’ offers appear on the site. This site does not include all companies or products available within the market.
Second, we also include links to advertisers’ offers in some of our articles. These “affiliate links” may generate income for our site when you click on them. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impact any of the editorial content on Forbes Advisor.
While we work hard to provide accurate and up to date information that we think you will find relevant, Forbes Advisor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof.
The comparison service on our site is provided by Runpath Regulated Services Limited on a non-advised basis. Forbes Advisor has selected Runpath Regulated Services Limited to compare a wide range of loans in a way designed to be the most helpful to the widest variety of readers.
The Forbes Advisor editorial team is independent and objective. To help support our reporting work, and to continue our ability to provide this content for free to our readers, we receive payment from the companies that advertise on the Forbes Advisor site. This comes from two main sources.
First, we provide paid placements to advertisers to present their offers. The payments we receive for those placements affects how and where advertisers’ offers appear on the site. This site does not include all companies or products available within the market.
Second, we also include links to advertisers’ offers in some of our articles. These “affiliate links” may generate income for our site when you click on them. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impact any of the editorial content on Forbes Advisor.
While we work hard to provide accurate and up to date information that we think you will find relevant, Forbes Advisor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof.
The comparison service on our site is provided by Runpath Regulated Services Limited on a non-advised basis. Forbes Advisor has selected Runpath Regulated Services Limited to compare a wide range of loans in a way designed to be the most helpful to the widest variety of readers.
Rising oil and gas prices have dominated headlines recently, with some commodity prices hitting record highs over the last year. In turn, this has attracted investors into the commodity sector, with Refinitiv reporting a net inflow of over $24 (£19) billion into commodity funds in 2022 to date.
Investing in commodities can help to diversify your investment portfolio across a range of different assets. Commodities may also produce superior returns to share-based investments when stock markets are volatile.
Here’s what you need to know about investing in commodities, including the different options for commodity-based investments and the general outlook for the commodities sector.
Stock market investment and investment directly in commodities is speculative and returns are not guaranteed. Your capital is at risk and you may not get back any money you invest.
Invest in a wide variety of commodities
Explore gold, silver, oil, wheat and more on eToro
Commodities are natural resources or agricultural products that are grown, mined or processed and are critical inputs in the production of food, energy and clothing.
There are two main types of commodity:
Commodities of the same quality or grade are often described as ‘fungible’, meaning that they are interchangeable, irrespective of where they were farmed, produced or mined.
Commodities are bought and sold in bulk on exchanges, in the same way as stocks and shares. The largest exchanges include the London Metal Exchange (LME), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in Europe.
While it’s possible to trade in physical commodities, it’s far more common to trade in futures contracts. In its simplest form, a futures contract allows producers and buyers to agree a price and terms for delivery of a commodity at a set future date.
So if an airline company believes that fuel prices will rise, it might mitigate this risk by buying a futures contract in oil – a process known as ‘hedging’. This helps both the buyer and the seller to ‘lock in’ their price. If the price of oil rises, the seller has sacrificed potential profit but has received certainty in return.
As with shares, the price of futures contracts varies with supply and demand. Professional commodity traders bet on the future price of a commodity – if they expect a price rise in a commodity, they’ll buy futures with the intention of selling them later at a higher price.
There are two primary reasons for investing in commodities, particularly in times of economic volatility and high inflation:
Inflation reduces the ‘real’ value of a currency over time, in other words, £10 today buys you less than it did 30 years ago.
Inflation in the UK recently hit a 40-year high of 9.1%, which impacts the returns of certain asset classes. For example, if companies struggle to pass on higher costs to consumers, share prices are likely to fall if profits are squeezed, while high inflation also reduces the value of income paid on fixed-rate bonds.
Commodity returns have historically been positively correlated with high inflation, in other words, returns increase when inflation is high. This is not entirely surprising given that inflation measures incorporate the cost of commodities such as petrol and electricity in their ‘basket of representative items’.
Along with cash, shares, bonds and property, commodities are another form of asset that can help investors to diversify their portfolio. Diversification offers a form of protection against one asset class under-performing and may help smooth the overall volatility of your portfolio.
As mentioned earlier, commodities typically perform well in times of high inflation, unlike shares and fixed-rate bonds. However, commodity prices are also impacted by factors such as the weather, natural hazards and geopolitical events.
Coffee futures recently hit their highest level in a decade, with Arabica prices doubling over the last year as a result of dry weather in Brazil and an increase in shipping and labour costs, while the price of natural gas rose by more than 30% after Russia’s invasion of Ukraine.
Darius McDermott, managing director of advisory firm Chelsea Financial Services, comments that: “Commodities have had a very good run recently on the back of supply chain disruption and rising prices.” He points to the S&P GSCI (a broad-based index of 24 commodities) returning 42% in 2021 and has already increased by another 22% this year.
Let’s take a closer look at the top three commodities by annual returns over the last four years:
Overall, there’s been a wide range of different commodities in the top three, from metals and agricultural products in 2018 to energy-based products in 2021.
There’s also been a significant variation in annual returns from the ‘top-performers’, from a high of 161% in 2021 to a low of 19% in 2018. Eleven of the 14 commodities categories posted a negative return in 2018, demonstrating the volatility of commodity prices.
Palladium has been one of the top-performing commodities, rising from around $800 (£640) to nearly $3,000 (£2,400) per troy ounce in the decade to April 2021.
Demand has soared as palladium is a key component in emission-reducing devices for cars. However, its price has subsequently dropped by a third to around $2,000 (£1,587) per troy ounce after an easing of supply constraints.
Overall, most commodities delivered positive returns in 2021, although this was not the case for some precious metals including gold, platinum, silver and palladium. This was due to weakening demand from investors, alongside a reduction in demand for metals used in electronics and vehicle production.
Energy-based commodities delivered substantial returns in 2021, as a result of the strong recovery in demand combined with disruptions to supply. The price of crude oil more than doubled to over $110 (£88) a barrel, with a similar increase in the price of coal, according to data from Trading Economics.
There are several ways to invest in commodities, depending on whether you want to buy the commodity itself, or invest indirectly. One option for buying a commodity in its physical form is to consider investing in gold or other precious metals, although this comes with challenges in terms of storage and trading.
It is also possible to trade in commodity futures or spot prices (via spread-betting or contracts for differences), however, these are designed for professional investors due to the risk of substantial losses. You would also need to open a commodities trading account with an online platform such as eToro or IG.
Investing in commodity-based shares and funds can provide indirect exposure to commodities, without the risks of trading directly in commodities:
Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) are a popular, low cost way of investing in commodities. ETFs typically track the performance of a basket of investments or an index, while ETCs track commodity prices. As they’re traded on the stock market, you can buy and sell them ‘live’ as with shares.
According to Trustnet, there’s over 400 commodity-related exchange-traded products to choose from, with two main types:
Investing in ETFs is a low-cost way of tracking a commodity or index, typically charging annual fees of around 0.2%, compared to 0.8% to 1.0% for actively-managed funds. The following commodity ETFs have been picked by Dzmitry Lipski, head of funds research at interactive investor:
Commodity-based funds and investment trusts pool money from investors to invest in a range of companies involved in the mining and production of commodities including agriculture, natural resources, clean energy and timber.
As many of these funds are actively-managed by a fund manager, they typically charge a higher annual fee than ETFs.
The following funds and trusts were picked by Mr McDermott for investors looking to add commodities to their portfolios (data sourced from Trustnet as at July 2022):
Another way to invest indirectly in commodities is to buy shares in companies that produce, mine or process commodities or related businesses.
Higher commodity prices allow companies to sell their products at a higher price – if production costs remain the same, this leads to an increase in profitability. However, share prices are also impacted by company-specific factors, together with broader geopolitical and environmental issues.
Investing in a commodities-related company provides the opportunity for capital growth if the share price rises, along with income in the form of dividends. A dividend is a cash payment to shareholders, usually made once or twice a year.
In the mining sector, Glencore (GLEN) is an Anglo-Swiss producer and miner of more than 60 commodities, including cobalt and nickel.
Keith Bowman, investment analyst at interactive investor, says: “Exposure to commodities which assist decarbonisation and energy transition under climate change concerns continues to keep Glencore in the gaze of investors.”
Looking at the oil and gas sector, Mr McDermott comments: “While the world is looking to move away from oil and gas, these markets still have a role to play for some time to come.”
He believes that oil and gas companies such as BP and Shell will “play a role in the transition to cleaner energy as they look to increase their renewable footprint.”
Shell (SHELL) is an British-Dutch company that produces and refines oil and natural gas. Its share price has remained flat over the past 5 years, however shareholders purchasing Shell shares two years ago would have enjoyed a 57% increase in share price. It has a current dividend yield of 3.2%.
In the agricultural sector, Mr McDermott points to companies such as John Deere (DE) and Kubota (KUBTY) “developing technologies to modernise farming practices and using artificial intelligence to provide ‘precision agriculture’.”
These include the calibrated fertilisation and watering of crops to increase production, together with the use of “artificial intelligence to differentiate between cultivated plants and weeds”.
Whether you’re looking to buy ETFs, funds or shares, you should be able to purchase these investments through your investment platform, in either a general investment account, or in a ‘tax-free wrapper’ such as an Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP).
As with other assets, any profit or capital gain made from investing in commodities, whether directly or indirectly, will be potentially subject to capital gains tax (CGT). However, everyone has a CGT allowance of £12,300 for the current tax year 2022/23. This is the amount of profit you can make before tax is payable.
The Russian invasion of Ukraine has caused a major disruption to commodity markets as both countries are major exporters of energy and agricultural products. This exacerbated existing issues relating to the recovery in demand from the pandemic combined with associated supply constraints.
The World Bank reports that “commodity prices have been extremely volatile” with commodities such as coal, nickel and wheat reaching record levels of volatility in the first quarter of 2022.
However, it is anticipated that the war in Ukraine will also have longer-term consequences on commodities markets. The World Bank forecasts that prices for energy and non-energy commodities will rise by 50% and 20% respectively in 2022, before “pulling back somewhat in 2023”.
This view is shared by Capital Economics, who predicts that energy prices will stay historically high this year as it expects the West to persist with plans to reduce its dependence on Russian energy.
Thereafter it also anticipates that the price of oil, industrial metals and agricultural products will start to ease in 2023 but warns of major risks to the upside for energy prices given the uncertainty surrounding the war in Ukraine.
Looking further ahead, Mr McDermott believes that agriculture could be “perhaps the greatest long-term story of all.”
He comments: “Feeding the world is going to be a major task that will require significant long-term investment” with a predicted global population of nearly 10 billion in 2050.
Commodities will also play a key role in the transition to green energy to meet the ambitious net zero emissions targets set at the last COP 26 summit. Clean energy technology is heavily reliant on metals such as copper, lithium, nickel and cobalt to allow storage of energy in batteries.
Tilmann Galler, executive director at JP Morgan, forecasts that demand for critical minerals could increase by between 70% and 110% by 2030. He says: “The clean technology transition is igniting a new supercycle in critical commodities, with natural resource companies emerging as winners.”
Investing in commodities may offer investors a potential hedge against inflation, together with a means of diversifying their portfolio across different assets. As with shares, commodity prices are volatile and should form part of a long-term investment strategy.
Depending on your preference and appetite for risk, you may choose to invest in commodity-based products such as ETFs, funds and shares. However, it is important that any investment in commodities forms part of a diversified portfolio.
Your investment can go down as well as up, and you may not get your money back. If you are unsure as to the best option for your individual circumstances, you should seek financial advice.
Invest in a wide variety of commodities
Explore gold, silver, oil, wheat and more on eToro
Having worked in investment banking for over 20 years, I have turned my skills and experience to writing about all areas of personal finance. My aim is to help people develop the confidence and knowledge to take control of their own finances.