Commodity prices are the market values of the many raw materials of our world. Touching our everyday life, commodities include oil, natural gas, gold, silver, cattle, wheat, corn, and lumber. As well as the nearly 90 other assets that trade on commodity exchanges.
For most investors, commodities remain very much a mystery. It’s easy to consider oil and natural gas as potential investments. And sure, perhaps you’ve thought about buying gold or silver, too – maybe you’ve already added a bit to your portfolio – but pork bellies? Now we may be in uncharted territory.
How Commodity Prices Perform
Supply and demand drive commodity prices. And considering that there are few if any, major oil fields left to discover, virtually no new mining shafts on the drawing board — and who knows about pork belly production? Tight supplies and rising prices sound like the winning formula for an investing profit.
Many professional money managers use commodities as a hedge against their stock portfolios. For nearly 150 years, commodity prices have run opposite to the price of equities.
And commodities often rise when inflation does, so it may offer a cost-of-living buffer to your investment portfolio, as well. But as any gold investor can tell you, commodities can set your head spinning with rapidly changing prices.
Commodities: a no-zero hero
There is at least one distinct advantage to buying a real asset: commodity prices can’t go to zero like stock and bond prices can. There is always a buyer for tangible items –the price may go low, but it’s not zero.
Tracking the history of commodity prices shows the close – yet inverse – relationship with the stock market as well as the U.S. economy. Generally, commodities saw gains in the late 1970s as the nation battled high-interest rates, rampant inflation and a recession. As the 1980s rang in a booming American economy, commodity prices took a turn lower, until the recession of the late 1980s, when commodities rebounded.
The Nineties were a time of economic prosperity, so you know what happened. Commodity prices remained depressed until the recession following September 11th, as well as the financial crisis in 2008. As the recession lingered into the 2010s, prices rose to historic levels.
How to invest in commodities
As with nearly every other investment you can think of, commodity exposure can be gained through exchange-traded funds that mirror a commodity index. In fact, trading on these ETFs often has a higher dollar volume than the trading for the raw material itself.
Mutual funds can also offer investments in commodity-related companies. And for the truly advanced investor, commodity futures are offered on exchanges such as the Chicago Board of Trade.