Should You Be Investing In Commodities?

Key Takeaways

• Commodities are an alternative asset class that can provide a hedge against inflation and diversification away from the more mainstream asset classes.
• Some examples of commodities include wheat, oil, gold, silver, cotton and sheeps wool.
• With many asset classes down in 2022, commodities can offer an alternative for investors who are looking for something different.

It’s been a rough ride for investors in 2022. The stock markets have crashed, the bond markets have crashed, the crypto markets have definitely crashed and even real estate is starting to turn.

It’s been a sea of red and there have been very few safe havens from the carnage.

In markets like this, investors need to get a bit creative. They need to look a bit harder and past the obvious in order to find ways to generate returns for their portfolio. Even if big gains aren’t necessarily on the cards, alternative assets can at least help limit the damage.

That’s especially important when the cost of living is increasing as much as it is. Even if your income and assets are staying flat, they’re actually going backwards in real terms due to the pace at which prices are rising.

You might be interested to know that there’s an asset class that sits right in the middle of these problems. It’s an alternative asset class which is very responsive to inflation, because it is in many cases the underlying cause of inflation.

There’s no point dragging out the suspense, you read the headline – it’s commodities.

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What are commodities?

A commodity is essentially something that people buy and sell, like a raw material or agricultural product. The defining factors for commodities are that they are interchangeable with other goods of the same type, and they’re often used to make other products.

For example, wheat is a commodity that’s bought and sold on the market. Farmers grow it, and then it’s sold to bakers who use it to make bread. The price of wheat can fluctuate based on supply and demand, which gives us a clue as to how commodities are directly linked to inflation.

Some other examples of commodities include oil, gold, silver, and even coffee beans. These are all things that people use and rely on in their daily lives, and their prices can also fluctuate based on market conditions.

If inflation is high, it’s often because the price of commodities has increased. This could be as a result of a bad year for crops, problems in the supply chain or even a war, like we’re seeing in Ukraine right now.

So for investors who hold assets which invest in commodities (like ETFs), it can provide some solid protection against rising inflation, because commodity prices can rise at similar rates.

Of course, like any investment, there are also risks involved with buying and selling commodities. The value of a commodity can go up and down, and it’s important to do your research and understand the market before diving in.

Overall, commodities are a key part of the global economy, and they play a big role in the things that we buy and sell every day.

The downside of investing in commodities

Commodity prices are a bit of a strange beast. Because they can be so easily influenced by events around the world, their price can fluctuate significantly over short periods of time. We saw how quickly oil prices crashed at the start of the pandemic, for example.

Another one is wheat – with Ukraine being one of the world’s largest producers, its price went through the roof when they were invaded by Russia.

So short term, we can have a lot of volatility. Long term though, this tends to even out and make the prices actually quite stable. In many ways this is a good thing, and for us as consumers it definitely is.

After all, we don’t want to see major increases in commodity prices because it means the prices we pay for the goods that they turn into (like bread and gas for our cars) would be going up significantly too.

That makes them good as a hedge and a diversifier in a portfolio, but not really suited to be the major focus for growing wealth.

How to practically invest in commodities

Ok so if you’re thinking you want to allocate some of your investment assets to commodities, how do you actually do it?

You could hire a truck and go find a farmer who’s willing to sell you some soybeans or sheeps wool. If you live in a condo that’s probably not going to be too practical. In fact, investors and traders who take up positions in commodities very rarely take physical delivery of them.

That’s because there is a huge financial system which has been created around commodities, allowing investors to buy them without needing to install a grain silo in their backyard.

The original aim with commodity contracts such as futures and options was to provide security to the businesses who do want to buy and sell the physical materials.

Farming is a notoriously fickle business. You’re at the mercy of the weather, as well as the potential for disease or natural disasters to spoil a year’s worth of hard work. Not to mention fluctuating prices making it very difficult to project future income.

This is where futures come in. These are contracts which allow a farmer to lock in a specific price for their goods, irrespective of the market price.

Imagine a farm producing coffee beans. Right now the price is $100/lb and the farmer needs to base his planning for the next year. He needs to know how many farm hands to hire, how much he can afford to pay for fertilizer and work out whether he can afford to pay his debts.

The problem is that over the next year, coffee beans could go up to $150/lb (great news) or down to $50/lb (terrible news).

To avoid this uncertainty, he could sell a futures contract which locks in his future crop at a price of $100/lb. Sure, he misses out if the price goes up, but he also protects himself if the price goes down.

On the other side of the deal might be a company like Starbucks. They have the same problem, but in reverse. They need to know how much they’re going to have to spend on coffee beans next year, and buying the futures contract locks in their cost base.

These futures and options contracts are available on every commodity you can think of, and they’re traded widely across the world. The vast majority of commodity based financial instruments aren’t traded by suppliers and producers, but rather by professional investors and fund managers who are looking to profit off the movement in commodity prices.

Like any financial asset, these are packaged into funds and ETFs which investors can buy into.

Use AI to invest in commodities

At Q.ai we take things a step further, and use the power of AI to invest in alternative assets like commodities. Specifically, our Inflation Protection Kit has been designed to do just that, by investing in assets that include Treasury Inflation Protected Securities, precious metals like gold and silver and, of course, commodities.

Every week our AI analyzes a massive number of historical data points and uses this analysis to predict how each of these assets are likely to perform in the coming week on a risk adjusted basis.

It then automatically rebalances the portfolio to align with these projections. If you’re invested in our AI portfolio, it goes a step further and predicts and rebalances all of your Kits against each other as well.

For investors who want to pick and choose the amount they invest in each Kit, our DIY portfolio limits our AI magic to within each Kit you’ve selected.

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