Investing in commodities: What you should know?

Commodities power our daily lives – from the oil in our cars to the sugar in our coffee, and indeed the coffee beans themselves. And increasingly investors are realising they need commodities in their portfolios too.

That is because commodities offer brilliant diversity to other asset classes. The most commonly traded commodities markets are oil, platinum, silver, gold, copper and natural gas.

Why Invest in Commodities?

Simple supply-and-demand economics drive the commodities markets; lower supply leads to greater demand, and an increase in prices. Traditionally, commodities move in opposition to stocks, and therefore – as alluded to above – they offer a good way to diversify a trading portfolio.

When stock markets are displaying unusual volatility investors often transfer money to precious metals, for example, as they are considered to be reliable. Further, precious metals can also be used to hedge against rapid inflation or times of currency devaluation.

And given the frequent fluctuations in the markets, commodities can be great instruments to ‘short’, too; by short selling, money will be made when there is a fall in market price.

In summary, commodities can be an important way to diversify a portfolio beyond traditional securities – either for the long term, or as a place to park cash during unusually volatile or bearish stock markets.