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The Beginners Guide to Commodities Investing by Brian and Gayle Rice

The Beginners Guide to Commodities Investing by Brian & Gayle Rice

Oil, gas, precious metals like gold, silver, and copper, as well as so-called “soft” commodities like wheat, sugar, and cocoa beans are examples of commodities, which are physical assets. After the traditional investing asset classes of cash, fixed income securities, stocks, and property, Martin Bamford, managing director of IFA Informed Choice, notes that commodities are frequently referred to as the “fifth” asset class.

Since the industry and the stock market and currencies have nothing in common, the price of commodities won’t always fall if equity markets decline. They frequently perform differently from these traditional asset groups, thus they may be highly helpful for portfolio diversification, according to Bamford.

Beginner’s Manual

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commodities

ETCs

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valuable metals

According to Russ Koesterich, global chief investment strategist at iShares, the exchange-traded product (ETP) division of BlackRock, “Investment into precious metals has considerably increased visibility over the previous decade.” The recent performance of precious metals, their merits in terms of diversification, and inflationary fears have reignited the conversation about this investment category among many institutional and private investors, even though gold has served as a store of value for thousands of years.

According to the Index Mundi commodities price index, commodity prices have virtually quadrupled over the preceding ten years even after accounting for recent sell-offs, with most of their success coming from the success story of developing countries.

What to invest in

There are three methods to invest in commodities: directly by purchasing them outright, indirectly through a fund or investment trust, or indirectly by purchasing shares of commodity firms.

Investing physically entails actually purchasing and holding the item; this presents storage challenges, however many bullion companies offer online gold trading and secure asset storage. Accessing the metal is also made simple by purchasing actual gold coins. Always visit the World Gold Council website first as it contains information about reliable businesses there.

Real direct exposure in commodities typically entails purchasing tangible items, such gold bars or coins. This may be costly since there are charges associated with buying, selling, as well as storage and insurance. Investors must also make sure they pay a fair price for the item. Especially when purchasing smaller amounts, this might be challenging to accomplish, says Bamford.

Purchasing stock in organizations like BP, Royal Dutch Shell, or Tullow Oil is one way to gain access to additional natural resources like oil and gas. The same holds true for firms that deal in “soft” commodities, however there are fewer of them on the UK indices. Your investment, however, will be impacted by fluctuations in the stock market as well as variations in the price of the commodity.

Accessing the market is simple with an investing fund. They also offer some degree of diversity because they frequently make direct investments in producing firms as well as a range of commodities.

Over the past few years, passive funds have also become more and more popular as ETPs (exchange traded products) have emerged as a practical means of gaining access to commodities either directly or indirectly. While exchange traded commodities (ETCs) are securities that follow the price of the commodity or a basket of commodities, equity-based commodity exchange traded funds invest in the shares of commodity firms. They can either have the commodity itself as a physical backup or they can have the exposure through swaps with other financial institutions.

However, there is little space for maneuver as ETFs only follow an index, like oil futures. ETCs also give investors the option to “short” or “leverage” their investment, allowing them to wager on the price rising or falling. Investors should exercise caution since, even if there are opportunities for gains, there also may be severe losses.

Private investors can utilize commodities to diversify their portfolios over the long term, hedge against inflation, and place bets on certain sectors or geographic areas. Investors should be wary of the investment’s exposure to the underlying commodity, though. Additionally, you should consider the rest of your portfolio because, for instance, a sizable portion of the FTSE 100 is already made up by oil and gas companies.

Consider purchasing the actual metal or commodity to diversify your assets, or spread your risk by purchasing a fund. The expenses will be kept down through a tracker fund.

Salepage : The Beginners Guide to Commodities Investing by Brian and Gayle Rice