Investing in commodities, including oil, gas and both precious and non-precious metals, is one way of diversifying an investment portfolio.
These commodities can be seen as the building blocks of industry – they are needed to make the other things we consume, as well as being consumed directly. Because of this, they rise in value when there is a rising demand for goods.
At present, many experts believe we are in what is known as a ‘commodity supercycle’, where the price of commodities remains high for some time. We are still experiencing shortages of some commodities after mining and production stopped during global lockdown, and the increase in demand as lockdown eased created a supply problem, pushing up prices.
For this to be a supercycle, though, these price rises would have to be sustained for some time, and it is far from clear yet how far they may go.
Here are five things to know before considering whether to invest in commodities at this stage in the game:
1. Commodity Supercycles are rare beasts
Sustained upwards movements in commodity prices have occurred before, but they certainly do not come around every day. They tend to be triggered by events that change consumption seismically, such as when China emerged as a new economic powerhouse a decade ago1.
Recent price rises have been triggered by an increase in demand worldwide as nations open up their economies following Covid-related shutdown. It remains to be seen whether this causes a sustained rise.
Real supercycles, including in the 1950s and late nineteenth century, lasted decades2.
2. Today’s commodities optimism is driven by something new
Where oil, gas and traditional industrial metals might have seen the bulk of rises in the past, the move towards renewable energy favours different elements. This could be the first ‘green’ supercycle, driven by our need to decarbonise our energy needs.
‘Transition’ metals, which include copper, nickel and platinum, as well as less well-known metals like vanadium, are all used in the production of batteries and electric cars, as well as other parts of the green economy.
It may be that the top commodities to buy this time are very different from past cycles3, as oil and gas become more problematic to own compared with metals used in the creation of renewable energy.
3. There are many ways to get exposure to commodities
Even those who do not think that they are invested in the price of commodities are likely to have exposure to them. Mining stocks and oil and gas companies are components of most large global indices, meaning that investors may be more exposed than they think to the prices of oil, gas and metals.
Because it is important that a portfolio is diversified, investor need to consider where they already have commodity exposure before buying more.
They also need to understand the pros and cons of investing in commodities via funds, which might buy into both mining stocks and hold metals or oil, or exchanged traded funds, which track the price of commodities but may not be invested in them.
4. Commodities can be a hedge for inflation
With inflation currently running at 2.5 per cent4, many investors will be looking for ways to ensure that their portfolios do not lose their value.
Many people regard commodities as a good way to hedge against inflation, as the price of most commodities tends to rise when inflation rises. If inflation is being caused by demand for goods and services, as it is at present, the price of those goods and services tends to rise too, pushing up the value of the commodities used to make them.