Commodities: Investment Guide

Find out all you need to know about commodities as an investment.

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A commodity is a physical asset that can be bought and sold, such as a raw material or a primary agricultural product. Common forms of commodities investment include metals such as gold and silver, as well as substances such as oil and gas. Certain foods, such as sugar, wheat and cocoa beans, are also classified as commodities, and are often referred to as 'soft' commodities. 

Correlation between the commodities sector and the stock market and currencies has historically been low but it tends to increase during more difficult periods. Commodity values can be volatile and subject to various economic factors, making them a risky choice. This is why at Equilibrium we steer clear of investments of this type.

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Despite representing a high-risk investment option, some people may decide to go down the commodities route in order to make their investment portfolio more diverse. By investing in gold, for example, you are receiving a tangible asset and are able to preserve wealth in a physical way. 

Investing in gold can bring rewards during times of economic uncertainty, and is seen as a safer bet during such periods, though it does not always work out that way! Rewards can sometimes only last during times of economic trouble, and gold becomes less 'safe' as economic conditions improve. If investing in other commodities, such as oil, you might also choose to buy shares in a company in the oil industry. This too can be risky, however, as it means investing in just one company.

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As mentioned, investing in commodities can be highly risky, with no guarantee of returns. The value of gold, for example, is particularly volatile and, because it is heavily traded by individuals in search of quick profit, its value is dependent on the actions of these investors. Likewise, oil is known as one of the most volatile commodities and is therefore perceived as an extremely risky choice of investment. 

The performance of commodities is also heavily reliant on the economies of supply and demand. Commodities don’t provide a natural return via an income as you normally receive from investments like equities, property or bonds. As such, prices will steadily increase when supply is low, and will rise as demand continues to grow. 

Although investing in commodities can provide you with a tangible asset, it can also present storage problems. Indeed, storage and insurance can be costly, while buying and selling costs for commodities can also be particularly high. 

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As detailed above, commodities represents a particularly high risk investment option and, as such, is not an investment that we at Equilibrium endorse. Commodities are better suited to investors willing to take a significant risk. 

 

The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is intended solely for the entertainment of the reader and therefore should not be relied upon in making investment decisions or be construed as financial advice.