ValueChampion’s Beginner’s Guide to Investing in Commodities

The commodities industry can be a good option for investors seeking to mitigate risk from stocks and bonds. Let’s take a look at why you might want to invest in commodities.

ValueChampion Editorial Team

by ValueChampion Editorial Team on Feb 27, 2024

commodities crude oil

 

Besides stocks and bonds, another market that investors may be interested in is commodities.

Consisting of raw materials ranging from energy products (oil and gas), to agricultural output (soy, corn and other grains, livestock such as pork, beef and chicken) and metals (gold, silver, iron, copper, platinum, etc), commodities have been seen to behave differently than stocks and bonds.

For instance, during high inflation, consumer spending reduces, leading to profitability challenges for certain companies. As a result, stock prices may fall.

However, the commodities markets may remain high during inflation. In fact, commodities becoming more expensive is a prime driver for inflation – think about how high oil prices impact prices at petrol pumps.

Hence, while a stock portfolio may fall during high inflation, a commodities portfolio may continue to do well. Therefore, combining both makes for a good way to balance things out.

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Past and current state of the commodities market

Commodities may be a compelling asset class for some investors, but it’s important to establish a clear understanding of the market before jumping in.

The key thing to note about commodities right now is this: overall, the commodities market is at a high, with prices well above average levels from 2015 to 2019. This is true for all major commodity groups, and around 80% of individual commodities, as per data from the World Bank.

commodities trading world bank
Source: World Bank

As shown in the above chart, commodities like coal, fertilisers and gas are trading at much higher prices, which is likely to continue exerting upwards pressure on inflation.

But from an investing standpoint, the macro-level data also indicates that commodity prices may be in for a decline, especially as global economic recovery continues to prove sluggish.

Of course, this is a very high level outlook, and there certainly are opportunities to be found as you drill down to a more granular level. The likelihood increases when you consider the wide range of strategies and timelines applicable to the commodities markets.

Therefore, it’s not that the commodities markets should completely be avoided right now. Rather, investors should take into account that prices are at higher-than-average levels, and should plan accordingly.

Related: Effective Techniques To Make Value Investing Work For You

Ways To Invest In Commodities

man investing in stock market
Souce: Pexels

Commodity Stocks

From extraction, to refining, processing, manufacturing, distribution and beyond, there are a vast number of companies that are involved in the commodity supply chain. The stock prices of these companies are often correlated to the commodities they deal in, and can act as good proxies for investors.

For instance, instead of investing in crude oil (via derivatives such as futures, as it is generally difficult for retail investors to trade oil or grain on actual ownership terms), investors may instead look towards oil and gas producers such as ExxonMobil.

Depending on the type of commodity, commodity stock may lean more towards growth (for example, renewable energy companies) or income, such as well-established oil producers with a long history of regular dividends.

Related: How to Pick Dividend Stocks For Your Portfolio

Commodity ETFs

Investors who prefer not to pick and monitor stocks on their own may look to commodity ETFs.

Because they are composed of a basket of different commodity stocks, commodity ETFs are inherently diversified. Investors can choose between actively managed commodity ETFs that may offer higher returns (but come with higher management fees), or go with low-cost ETFs that simply replicate a commodity market index.

ETFs are also advantageous for their flexibility, as investors are free to buy and sell their holdings at their sole discretion via an online brokerage.

Commodities As Stores of Value

Certain commodities such as gold, silver and palladium have inherent characteristics that make them suitable as stores of value. This includes being able to hold its value over time, and relatively low price volatility.

Investors can choose to purchase and hold gold or silver bullion as an alternative to cash – this allows them to avoid the erosion of buying power.

For example, the US Dollar has lost more than 60% of its value today compared to 20 years ago. Meanwhile, in the same time period, the price of gold has risen from US$12.64 per gram to US$65.18 per gram – that’s over a 5x difference.

This clearly illustrates the usefulness of certain commodities as a hedge against inflation and a long-term store of value.

Related: Going For Gold — How to Invest in This Commodity

How To pick The Right Commodity Stocks

Given the vast range of choices available in the commodity markets, picking the right stocks, ETFs or assets pretty much boils down to your investing goals and timeline.

Additionally, since commodities are so essential to our everyday lives, it is likely that some of your current investments may already be related to commodities or commodity stocks. Oil and gas companies, petrochemical corporations or entities that deal with these sectors are prime examples that come to mind.

Understand that commodities are another asset class that can help you achieve your investing goals. You may want to consult a professional fund manager or investment expert to better understand how to apply them effectively in your own portfolio.

Related: Environmental, Social, & Governance (ESG) Investing in Singapore: The What, Why and Hows Behind Sustainable Investing

Best Online Brokerages To Invest In Commodities

Moomoo

1 Apr - 1 Jul 2024: New users can get up to 6.8% p.a. returns with Moomoo Cash Plus and up to 1 free AAPL Stock (worth ~S$243).

Moomoo

moomoo by FUTU is a great brokerage for investors who are looking for a platform that allows them to get the most bang for their buck.

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Moomoo


Pros

  • Lowest commission fees in Singapore
  • Lifetime $0 commission for US stocks
  • No minimum income requirement

Cons

  • Commission free trades only apply to US stocks, does not apply to SG or HK stocks
  • High margin rates
More Details

A member of SGX Group, Moomoo is a highly popular online brokerage that has attracted a sizable market share. By some estimates, as many as 1 in 5 Singaporeans currently trade on Moomoo.

For commodities trading, Moomoo offers several options, such as metals futures including gold and silver, as well as US-listed ETFs. The latter is especially suited to beginner and casual investors; Singapore-based members can enjoy S$0 commissions when trading US and SG ETFs, along with stocks and ADRs too.

Webull

New Users- Get 5 FREE SHARES (worth US$10 - US$500 each) when you subscribe and trade with Moneybull.
New and existing users- Get up to US$450 transfer fee subsidy and US$10,000 NVDA shares when you transfer in shares.

Webull Online Brokerage

Webull has some of the lowest trading fees currently available, making it suitable for those who are just getting started with investing or those with a small investment budget.

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Webull Online Brokerage


Pros

  • Supports fractional trading for US stocks
  • Allows you to earn interest on your idle cash
  • Allows you to automate your investing

Cons

  • Trading of US stocks during overnight hours has slightly higher commission fees than during regular and extended hours
  • Limited investment features
More Details

With zero platform fees and low trading commission, Webull is a well-liked online brokerage for many retail investors. Another reason to keep them top of your list is the good selection of commodities on offer, ranging from ETfs to individual companies that deal in energy, utilities and base materials.

You’ll find commodity instruments of every stripe, ranging from the broad-based VanEck CMCI Commodity Strategy ETF, to the cow and cattle-focused iPath Bloomberg Livestock SubTR ETN, and everything in between.

Saxo Markets

SAXO Capital Markets

An excellent, low-cost platform that offers great market access.

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SAXO Capital Markets


Pros

  • Low-fee brokerage with great user interface
  • Access to international markets
  • Fees for higher-tier monthly plans can be waived with points
  • Earn interest on uninvested cash without any lock-in period for higher-tiered accounts

Cons

  • Interest on cash balance not available for the Bronze account plan
More Details

Saxo Markets is catered to advanced investors looking to trade commodities using derivatives. The online brokerage offers several ways to trade, including commodities futures, options, and Contracts-for-Difference (CFDs).

Additionally, you can also trade the spot metals market, as well as stocks and shares of companies with dealings in commodities, including mining and oil.

The platform offers a tiered pricing plan so you can adjust your trading costs according to your frequency and volume of trade.

Looking for more channels to trade the commodities markets? Read our review of the top online brokerages in Singapore to help you narrow down the ideal platform.

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