According to commodity trader – Rowan Relton, the performance of commodities over the past few years is drawing the attention of retail investors away from crypto but into commodities.
The invesco DB commodity index tracking fund is up by 56% over the last year alone with no sign of stopping anytime soon.
Commodities trading are different from stock due to the uniqueness of the risk to reward profile so extra due diligence is required.
What are Commodities and Commodities Investing?
Commodities are raw materials that can either be consumed directly, such as food, or things that can be mined, drilled or grown and used to produce other goods or materials. Investing is simply an act of buying and selling of these raw materials to either earn a profit of or hedge a risk. It can be done through the use of future contracts or exchange-traded products (ETPs).
Why Investors Choose Commodities?
Here is Rowan Relton, a professional international commodity trader in the past 15 years. He gave the following reasons on why investors choose commodities over crypto.
Diversification is one of the most important reasons why investors add commodities to their portfolio. This is when you invest across different industries that react differently to any changes in the market. For example, if you invest in both oil and car companies, you will be protected against losses in case oil prices fall and cars increase in value.
Commodities and commodity stocks provide returns which are different from other stocks or bonds. A portfolio with different commodities will increase the chances of investors making profit.
2. Potential Returns
Individual commodities prices fluctuate due to factors such as supply and demand, exchange rates, inflation, and economic issues. Increased demand for commodities due to global infrastructure projects has greatly influenced commodity prices positively. Therefore, a rise in commodity prices directly impacts the stocks of companies in related industries.
3. Potential Hedge against Inflation
“Inflation which weakens the value of stocks and bonds can often mean higher prices for commodities,” says Rowan Relton. Even though commodities can show strong performance in periods of high inflation, it is important to note that they can be much more volatile than other types of investment.
4. Less Manipulation
Unlike crypto, it is very hard to manipulate prices in commodities. This is due to the fact that it is governed by international price movements; commodity markets are less prone to rigging or price manipulation. Also trades in commodities are conducted on electronic trading platforms accessible to all market participants
5. Hedge against Risky Geopolitical Events
Geo-political events like riots, war, conflicts disorganized supply chains can occur. It can results in scarcity of resources because it will be difficult to transport goods and raw materials to the factory or from the factory to the consumer.
When this happen, there will be mismatch of demands and supply which result to the exponential increase in the price of commodities
During such an event, investing in commodities can help in increasing one’s portfolio.
Investors should consider investing in commodity exchange-traded funds (ETFs) to profit from rising commodity prices, says Rowan Relton, commodity trader. Exchange traded profit replicates the performance of its security. For example, the increase of the wheat price will positively affect the agricultural exchange-traded fund shares.