Investing in commodities can be a profitable way to diversify a portfolio, especially in times of market volatility. However, with so many options, it is hard to know which are the most lucrative commodities for investment. Whether you’re new to commodity investing or looking to expand your knowledge, this guide will help you navigate the opportunities in this dynamic market.
What Are Commodities?
Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services rather than finished goods sold to consumers. Some traditional examples of commodities include grains, gold, base metals, oil, and natural gas. Commodities can be bought and sold on specialised exchanges as financial assets. There are also well-developed derivatives markets whereby you can buy contracts on such commodities.
Which Commodity is the Most Volatile?
Energy sources like natural gas and crude oil are among the most volatile commodities. Changes in supply and demand, technological breakthroughs, regulatory policy changes, and geopolitical events can all have a significant impact on their costs.
The Most Lucrative Commodities for Investment
As of now, there are three commodities that are most lucrative. The three most lucrative commodities for investment include:
Gold
The gold market has diversity and growth. It’s used in jewellery and technology, by central banks, and investors. The precious metal has traditionally been a safe investment and a hedge against inflation. Just like crude oil, when there’s an increase in demand, the same happens to the price of gold. Furthermore, prices are affected when central banks decide to diversify their monetary reserves by buying more gold.
Crude Oil
With crude oil, it helps to know what shapes prices and how you can invest in this commodity. After production, crude oil is refined into many different products, including gasoline. But it goes beyond just gas. Products made from petroleum include plastics, medicines, floor wax, ink, cosmetics, synthetic fibres, fertilizer, asphalt, and thousands of others.
Crude oil generally reacts to the laws of supply and demand. When demand exceeds supply, prices tend to rise. When supply remains fairly consistent, prices tend to fall. For instance, when gas is in high demand, the price at the pumps rises, translating into higher crude oil prices.
Base Metals
Base metals are common metals used in commercial and industrial applications like construction and manufacturing. They are relatively inexpensive, and supplies are generally stable because they’re commonly found around the world.
What is the Best Way to Invest In Commodities?
Investing in commodities is a great way to diversify your investment portfolio and hedge against inflation. The best way to invest in commodities is through Exchange-traded funds (ETFs). ETFs allow investors to invest in a variety of commodities without having to buy individual futures contracts.
When Should You Buy Commodities?
There is no specific or perfect time to buy commodities. Commodities are a hedge against inflation, so buying before periods of high inflation is a good investment strategy; however, predicting when inflation will occur can be tough. A commodity should be viewed as any other investment, taking into consideration an investor’s time horizon and risk profile.
What Are the Benefits of Investing in Commodities?
One of the biggest benefits of investing in commodities is the fact that they tend to protect investors against the effects of inflation. Generally, demand for commodities tends to be high during periods of high inflation, which pushes up prices.
Commodity investing has the ability to optimise returns in addition to the advantages of diversity. Global demand is high even if commodity prices are influenced by market forces such as interest rates, exchange rates, and the state of the world economy.