In this article we discuss:
- Overview of commodities investing
- What drives the price of commodities
- The benefits of commodities investing
- How to invest in gold stocks & ETFs
- How to invest in oil stocks & ETFs
Commodities investing in 2023
Investing in commodities has historically been out of reach for everyday investors – with commodities investing typically reserved for institutional or sophisticated investors.
That has changed in recent years with the rise of exchange traded funds or ETFs – which have given investors the ability to easily invest or gain exposure to a wide range of commodities – from gold, oil, silver, cattle, wheat, eggs and more.
Like regular ETFs – commodity ETFs are pooled investment funds made up of a variety of different assets – including commodities derivatives (like oil futures) and / or physical commodities (like physical gold).
One quirk of commodities investing? You can’t actually invest in US onion futures. In 1955 two traders cornered the US onion market – wreaking havoc on the price of the all important staple, farmers even went bankrupt, and at one point the sacks used to carry the onions became more valuable than the onions themselves!
While you can’t buy onion futures in the US – you can use stocks and ETFs to gain exposure to almost any commodity. Here is one popular broad-based commodity ETF:
iShares GSCI Commodity Dynamic Roll Strategy ETF (NASDAQ:COMT)
With commodity focused ETFs like the iShares GSCI Commodity Dynamic Roll Strategy ETF or COMT – investors can gain exposure to the performance of the entire global commodities market in just one trade.
ETFs like COMT have relatively low fees – with management fees of 0.48%, are sufficiently large, with assets under management of US$903 billion, and have achieved returns of 5.27% per annum over the last five years to 17 April 2023.
Abrdn Bloomberg All Commodity ETF or BCD is another commodities focused ETF that investors could purchase if they were interested in gaining broad exposure to global commodity markets.
What impacts the price of commodities?
Like stock investing, the factors that contribute to the price of commodities are incredibly complex and oftentimes unpredictable.
Here are two factors to help you get a sense of what impacts the price or value of different commodities.
Supply and demand
In economics, when you have a fixed supply but increased demand, the price of the item in question will usually go up.
One of the most well known examples of this is the price of lithium.
According to S&P Global data, the price of lithium carbonate – a key ingredient in the production of electric vehicle batteries – surged from just US$5,180 per tonne in 2010 all the way up to US$75,000 in 2021, as demand for the commodity shot up as a result of the electric vehicle boom.
While lithium prices have come down significantly since that peak, such an example shows how sensitive commodities can be to long and short term shifts in demand, and how certain ‘mega trends’ can catapult the price of commodities higher.
Geopolitics and governments
Geopolitics and in particular – the intervention of governments in markets – can have pronounced impacts on the price of certain commodities.
In 2020, Vale – one of the world’s largest iron ore miners was ordered by the Brazilian government to shut down its Conceição, Cauê and Periquito mines following a covid-19 outbreak.
While three mines might sound insignificant, those mines alone made up around 2% of the world’s total iron ore supply. In response to this move from the Brazilian government, iron ore futures prices jumped, as the market recalibrated its expectations of total iron ore supply for the coming quarters.
This shows how even slight changes by governments – and slight changes to the supply-demand equation of commodities can have outsized impacts.
Beyond those factors listed above, extreme weather conditions, changing consumer preferences, and technological advances can also impact commodity prices.
What are the benefits of commodities investing?
From diversification, hedging against inflation, and the prospect of outperformance, there are many reasons that commodities investing might be attractive to individuals.
Beyond products like stocks and bonds, commodities, including precious metals, give investors the chance to further diversify and even increase the efficiency of their investment portfolio.
Let’s unpack that further.
According to the global investment company Abrdn, ‘a precious metals allocation increased efficiency in a diversified stock-bond portfolio.’ For those with allocations to risk assets – like US stocks – exposure to precious assets can act as an effective ‘risk-management tool’ and provide ‘effective diversification’.
Blackrock also calls out the diversification qualities of investing in commodities, noting on COMT’s product page that not only can commodities exposure help diversify your portfolio but an allocation in commodities can ‘potentially protect against inflation.’
An inflation hedge
With inflation still elevated in 2023, many investors might be keen to explore commodities investing further. This is because commodities – opposed to stocks – often benefit from rising inflation.
Citing recent studies, financial market data provider Refinitiv recently wrote that ‘an increased allocation to commodities provides high returns when stock and bond returns are at their weakest, and that it hedges against increases in inflation.’
The recent performance of commodities as an asset class further underscores how they can factor into a diversified portfolio and act as an inflation hedge during periods elevated inflation.
This also speaks to the possibility that an allocation into commodities might provide investors with outperformance – particularly against other asset classes, during periods of high volatility.
Despite 2022 being an extremely volatile year for equity markets – with the S&P 500 losing close to 20% of its value – commodities not only rose, but they were the best performing asset of 2022!
According to data compiled by Blackrock, commodities gained 22% in 2022, second only to cash – which rose 1.3%. Contextualized – commodities and cash – were the only two asset classes to register positive returns during the year.
All of this shouldn’t be used to suggest that investors should build a portfolio of only commodities or commodities focused products. Rather, it should be used as a reminder that building a truly diversified portfolio involves making investments across geographies, sectors, and asset classes.
Discover more about our brokerage platform – including how you can leverage it to invest in commodities – today.
Commodities investing deep dive: gold and oil
Although there are many niche commodities to invest in – from livestock to palladium – below we take a deeper look at how investors can gain exposure to two of the world’s most important commodities: gold and oil.
How to Invest in gold with Syfe
Whether it’s gold stocks or ETFs that you are interested in, you can directly invest in both through Syfe’s brokerage platform.
Gold as an investment: overview
Gold has long been considered a store of value and a hedge against uncertainty in times of elevated volatility.
To be sure, the precious metal has been a remarkable store of value over the long run, with a single ounce of gold worth US$1,993 as of 24 March 2023.
But why is gold so valuable and why is it so coveted by investors?
In short, gold derives its value from its scarcity, its functionality, including its use in the production of high-value electronics and medical devices, and from perceptions around its status as a ‘hedge’ or ‘store of value’.
While some have speculated that ‘gold is a bubble’, perceptions around gold being an effective store of value have yet to be disproven. Amid war, pandemic, and financial market meltdowns, the price of gold has performed strongly, rising close to 500% in the last 20-years.
Investing in gold ETFs & stocks
For the majority of investors, buying gold stocks or ETFs is likely the easiest and most suitable way to invest in gold in 2023.
When you invest in a gold stock or ETF you don’t have to worry about storage, have significantly more investment choice, and selling your investment to potentially realise a profit is just a swipe away.
Here are the ways individuals can invest in gold in 2023.
The first way is to buy physical gold – including gold coins, bars, or other gold products. There are a few drawbacks to this method, including the need to securely store your gold and the potential difficulty you might encounter when trying to sell your gold.
iShares Gold Trust ETF overview (NYSEARCA:IAU)
For investors looking to gain exposure to the price movements of physical gold, without the drawbacks of owning gold directly – the iShares Gold Trust or IAU – might be an option worth considering.
This ETF gives investors exposure to the daily price movements of gold bullion, has returned 8.08% per annum since inception, and has fees of just 0.25%.
Barrick Gold Shares overview (NYSEARCA:GOLD)
For those more interested in investing directly in gold resources companies, one popular gold stock is the US-listed Barrick Gold – trading under the ticker GOLD – one of the world’s largest gold producers.
In 2022 Barrick produced 4.1 million ounces of gold, generated US$432 million in earnings, and returned US$1.6 billion to shareholders.
Wall Street analysts are currently bullish on Barrick, assigning the stock a Buy rating on average and an average price target of US$21.64 per share, as of 24 March 2023.
Now let’s look at how you can invest in oil.
How to invest in oil with Syfe
Whether it’s oil stocks or ETFs that you are interested in, you can directly invest in both through Syfe’s brokerage platform.
Oil as an investment: overview
To this day, oil remains the world’s most important commodity – powering everything from our vehicles, providing us with electricity, and heating our homes.
And while much progress has been made on generating energy from renewable sources – like solar, wind, and hydro – the world continues to consume significant amounts of oil each day.
In 2022 99.4 million barrels of oil were consumed a day. In 2023 that number is forecast to increase to 100.9 million barrels of oil a day.
Zooming out, against a backdrop of global instability, supply disruptions, and concerns over underinvestment in oil projects, oil prices have remained elevated – with crude oil trading around US$80 a barrel as of 24 March.
Higher oil prices have been a boon for oil investors in recent years, with the likes of Exxon Mobil and Chevron seeing investors bid up their shares aggressively in the 5-years to 23 March 2023.
Investing in oil ETFs & stocks
There are a number of ways to invest in oil. For most investors, buying oil stocks or ETFs is likely the most suitable approach.
These days investors can gain direct exposure to the price movements of oil through ETF products, removing the need to deal with complex and high risk instruments like oil futures.
The United States Oil Fund ETF or USO, for example, gives investors exposure to the changes in the spot price of crude oil. USO has a total expense ratio of 0.81% and traded at US$60.99, as of 23 March 2023.
Directly investing in companies in the oil and gas sector is another viable option. With oil prices well off the lows achieved in recent years, many oil and gas companies have become attractive dividend stocks.
Exxon Mobil Shares overview (XOM)
Exxon Mobil – for example – is currently the largest US-listed oil and gas company, boasting a market capitalisation of US$420.9 billion. In 2022 Exxon reported US$55.6 billion in profits and paid out US$14.9 billion in dividends to its shareholders.
For those looking for a slightly more diversified approach, an oil ETF – made up of a number of oil companies and other related products – might be considered an attractive option.
Energy Select Sector SPDR Fund overview (XLE)
The Energy Select Sector SPDR Fund or XLE is a popular equity-focused ETF, tracking the largest and most important energy companies in the S&P500’s Energy Select Sector.
As of 24 March, XLE had a dividend yield of 5.18%, management fees of 0.10%, and achieved annualised returns of 26.92% over the last 3-years.
How to build your wealth with Syfe
Whether you are a beginner investor, or someone who is savvy and seasoned in investing, there’s something for everyone at Syfe to build wealth for a better future. Check out our managed portfolios or direct investing options – to via our brokerage platform today.
Disclaimer: This article is for informational purposes only and should not be viewed as financial advice. It is not meant to market any specific investment, or offer or recommend the purchase or sale of any specific security. All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone. This advertisement has not been reviewed by the Monetary Authority of Singapore.