Diversification is a fundamental principle of sound investing. One powerful way to achieve this is by adding commodities to your portfolio. But what exactly are commodities, and how can you invest in them wisely?

This guide will walk you through how to invest in commodities, explain different types, strategies, risks, and help you determine if commodity investing aligns with your financial goals.

What Are Commodities?

Commodities are raw materials or primary agricultural products that can be bought and sold, such as:

• Metals: Gold, silver, copper, platinum
• Energy: Crude oil, natural gas, coal
• Agricultural products: Wheat, corn, coffee, soybeans
• Livestock: Cattle, hogs

These are the basic building blocks of the global economy, making them a key asset class for investors seeking diversification and inflation protection.

Why Invest in Commodities?

Here are the top reasons to consider commodities in your investment strategy:

1. Diversification

Commodities often move independently of traditional assets like stocks and bonds. For example, gold often rises when stocks fall, offering balance in volatile markets.

2. Inflation Hedge

Commodities tend to increase in value during inflationary periods. Rising commodity prices can preserve purchasing power.

3. Global Demand

As economies grow—especially in developing nations—demand for raw materials increases, which can drive commodity prices upward.

4. Portfolio Performance

According to a 2023 Morningstar study, a portfolio with a 10% allocation to commodities saw reduced volatility and better risk-adjusted returns compared to one without.

Common Ways to Invest in Commodities

1. Direct Investment (Physical Commodities)

You can purchase actual commodities like:

• Gold bullion or coins
• Silver bars
• Agricultural products (less common for individual investors)

However, physical ownership comes with storage, security, and insurance challenges.

2. Commodity Futures Contracts

Futures are agreements to buy or sell a commodity at a future date and price. This method is favored by institutional investors and traders.

Pros:

• High leverage potential
• Direct exposure to price movements

Cons:

• Complex and risky
• Requires margin accounts and deep knowledge

3. Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)

ETFs and ETNs offer easy access to commodities without owning the physical asset or trading futures.

Popular commodity ETFs:

• SPDR Gold Shares (GLD)
• iShares Silver Trust (SLV)
• Invesco DB Commodity Index Tracking Fund (DBC)

Benefits:

• Liquidity
• Diversification
• No storage hassle

4. Stocks of Commodity Producers

Investing in companies involved in commodity production, such as:

• Energy: ExxonMobil, Chevron
• Metals: Newmont Corporation, Barrick Gold
• Agriculture: Archer Daniels Midland, Bunge

These stocks tend to move with commodity prices but also depend on company fundamentals.

5. Mutual Funds and Index Funds

Some mutual funds specialize in commodity-related assets or hold shares in commodity companies.

Example: Fidelity Global Commodity Stock Fund (FFGCX)

These funds are actively managed and can offer professional oversight for beginners.

6. Managed Futures Accounts

Professionally managed portfolios that use futures contracts. Suitable for high-net-worth investors seeking hands-off commodity exposure.

How to Start Investing in Commodities: Step-by-Step

Step 1: Assess Your Risk Tolerance

Commodities are volatile. Ask yourself:

• Can I handle large price swings?
• Am I investing for short-term speculation or long-term diversification?

Step 2: Choose Your Commodity Type

Are you interested in:

• Precious metals like gold and silver?
• Energy like oil and gas?
• Agriculture?

Focus on commodities aligned with your market outlook and risk profile.

Step 3: Select Your Investment Vehicle

• For beginners: ETFs and mutual funds
• For intermediate investors: Commodity producer stocks
• For experienced investors: Futures contracts

Step 4: Allocate Strategically

Experts typically recommend:

• 5% to 15% of your portfolio in commodities
• Rebalance regularly to maintain target allocations

Step 5: Open the Right Brokerage Account

Make sure your broker supports:

• Commodity ETFs and mutual funds
• Futures trading (if applicable)
• Research tools and educational resources

Popular brokers: Fidelity, Schwab, Interactive Brokers, TD Ameritrade

Risks of Investing in Commodities

1. High Volatility

Commodity prices can fluctuate rapidly due to:

• Weather events
• Geopolitical tensions
• Supply chain disruptions

2. Leverage Risk

Futures contracts involve leverage, which magnifies gains and losses.

3. Market Speculation

Commodity prices are often driven by speculative trading, not just supply and demand.

4. Storage and Insurance Costs

If you own physical commodities, logistical issues can erode returns.

When Should You Invest in Commodities?

Ideal scenarios for commodity investing include:

• During inflationary periods
• When stock market volatility is high
• In early phases of economic recovery
• When global demand is rising, especially from emerging markets

Case Study: Commodities During the 2008 and 2020 Crises

2008 Financial Crisis:

• Gold surged as a safe-haven asset
• Oil crashed due to collapsing demand

COVID-19 Pandemic (2020):

• Gold hit all-time highs (~$2,070/oz)
• Agricultural commodities rebounded due to supply chain disruptions

Lesson: Commodities respond differently during crises. Diversification within commodities is key.

Tax Implications of Commodity Investing

1. Futures Contracts

Taxed under the 60/40 rule:

• 60% long-term capital gains
• 40% short-term capital gains

2. Physical Commodities

Subject to collectibles tax rate (up to 28% in the U.S.)

3. Commodity ETFs and ETNs

Tax treatment varies:

• Some generate K-1 forms
• Others use 1099 forms

Tip: Consult a tax advisor before investing.

Best Practices for Investing in Commodities

• Start small and scale up
• Use stop-loss orders to limit downside
• Monitor macroeconomic indicators
• Stay updated on geopolitical events
• Rebalance your portfolio periodically

FAQs about How to Invest in Commodities

Conclusion: Is Commodity Investing Right for You?

Now that you understand how to invest in commodities, you can decide whether they fit your overall investment strategy. Commodities offer unique advantages—like inflation protection and diversification—but also come with distinct risks.

If you’re looking to enhance your portfolio’s resilience in uncertain economic conditions, a well-planned commodity allocation can be a valuable asset.

Ready to get started?
Open an investment account with a trusted broker, research your options, and start small. As with any investment, knowledge and discipline are your best tools.

Ahmad Faishal

Ahmad Faishal is now a full-time writer and former Analyst of BPD DIY Bank. He’s Risk Management Certified. Specializing in writing about financial literacy, Faishal acknowledges the need for a world filled with education and understanding of various financial areas including topics related to managing personal finance, money and investing and considers investoguru as the best place for his knowledge and experience to come together.

Author: Ahmad Faishal

Ahmad Faishal is now a full-time writer and former Analyst of BPD DIY Bank. He's Risk Management Certified. Specializing in writing about financial literacy, Faishal acknowledges the need for a world filled with education and understanding of various financial areas including topics related to managing personal finance, money and investing and considers investoguru as the best place for his knowledge and experience to come together. View all posts by Ahmad Faishal