Invest in Commodities
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Investing in the price of a commodity can be done through several different financial instruments and securities. This includes CFDs, trackers, mini-futures, and Bull & Bear certificates. The largest trading volume occurs in gold and oil, but investments can also be made in the price of copper, corn, pork, or palladium, for example. In this article, different categories of commodities, what affects their prices, and investment alternatives are presented. What are Commodities Commodities are goods that are mined, grown, or otherwise extracted from nature. They represent the first step towards a finished product. For example, the commodity wheat is used to produce bread, which is then sold to the end consumer. The commodity is processed and thus transformed according to its ultimate purpose. All commodities have unique properties, which also form the basis for their use. Within metals, for instance, properties include how easily they erode, conduct electricity, their weight, and durability. Commodity categories we write about here at Aktiekunskap: Precious Metals Base Metals Soft Commodities / Agricultural Commodities Energy Commodities Each commodity category contains links to our articles about individual commodities. Why Invest in Commodities? Portfolio Diversification Commodities can be used to create broad risk diversification in an investment portfolio, complementing assets like stocks. The most common commodity investment is gold. Hedge Against Inflation Commodities generally increase in value when inflation is expected to rise. This is because general price levels in society increase with inflation. No Company-Specific Risk Investing in the price of a commodity involves no company-specific risk (unlike stocks). If there's a belief that the demand for, say, corn will increase, investments can be made in the price of corn instead of in companies that grow and distribute corn. Option to Physically Own the Commodity Most people choose to invest via a stockbroker or CFD platform. However, it's also possible to buy gold/silver/platinum and keep the physical asset at home. Hard Commodities Commodities are categorized into hard, soft, and energy commodities. Hard commodities include various types of metals, which are further divided into precious metals and base metals. Precious Metals Precious metals are metals with low reactivity (little affected by external influences) and a high melting point. Thus, they erode very little and can be seen as value-preserving over time. This is why precious metals have historically been used not only for industrial purposes but also as a means of payment and an investment object. Gold is the precious metal primarily mentioned regarding means of payment, store of value (store of value), and inflation hedge. The metals' areas of use depend on their unique properties. Primarily, precious metals are used in the electronics and jewelry industries. Some are also used in the automotive industry (palladium / platinum) due to their catalytic properties. Several precious metals (primarily gold and silver) are used as speculative and investment objects, especially during stock market unrest. This means that the price of these precious metals is influenced more by speculation and investments than by demand from a user perspective (industry, technology, electronics, etc.). Examples of precious metals: Gold Silver Palladium Platinum Copper Read more in-depth about precious metals here at Aktiekunskap. Base Metals Base metals are defined somewhat differently depending on the context. They are typically metals that are more abundant than precious metals, oxidize easily, and therefore do not retain value over time, and have a lower price than precious metals. These metals are used in everything from construction and technology to industrial components. Primarily, the demand for various base metals drives their price on the world market. Thus, it is mainly the manufacturing industry that controls demand. Examples of base metals: Iron Aluminum Zinc Lead Read more in-depth about base metals here at Aktiekunskap. Soft Commodities / Agricultural Commodities Soft commodities are commodities from the agricultural sector. This is also why they are often referred to as agricultural commodities. In English, these commodities are called "softs," a term also partially used in Sweden. These commodities are primarily used for food, such as wheat, pork, and cocoa. But soft commodities can also be used for textile production (cotton) and alternative energy sources (corn and sugar). Demand is thus influenced, for example, by changing consumption patterns, but also by the price of energy sources, as alternative energy sources can then be seen as an option. Supply can be affected by natural disasters, viruses, good harvest years, etc. Examples of soft commodities / agricultural commodities: Wheat Pork Corn Sugar Cotton Orange Juice Cocoa Read more in-depth about soft commodities here at Aktiekunskap. Energy Commodities Energy commodities are commodities whose primary purpose is to create energy through a chemical or physical reaction. This category includes, for example, oil – although oil is not exclusively used for energy. These commodities can be used for heating, electricity, or mechanical energy. The need for energy commodities increases, for example, with urbanization and electrification. However, they are partly replaced by alternative energy sources such as wind power and solar energy. This transition can, however, increase the need for another commodity – metals. “The transition from fossil to renewable energy sources (e.g., solar cells, wind turbines) and the production of electric cars will increase the demand for metals.” / Jörgen Kennemar (Swedbank) in interview with Aktiespararna 2020. Examples of energy commodities: Oil Natural Gas Coal Uranium Read more in-depth about energy commodities here at Aktiekunskap (article coming soon). What Affects the Price of a Commodity? Commodity prices are solely affected by supply and demand. However, demand does not always depend on increased use of the specific commodity but can also be driven by speculation on future price increases. A clear example of this is the volatility of oil prices. The demand for using oil certainly does not change as quickly as the price curve below shows. However, speculation in the price affects this change. Factors that, for example, affect commodity prices: Supply: Natural disasters New major commodity discoveries Political decisions Trade wars Demand: Technological development Political decisions Economic growth Low interest rates – increases willingness to invest How to Invest in a Commodity Investing in commodities can be done through a variety of securities. The primary differences between them are whether trading involves leverage, whether trading can occur within an ISK (Investment Savings Account), and how clear the exposure is to a single commodity. Stocks Partial exposure to price Also company-specific risk Buying shares in companies within the commodity industry provides some exposure to the price of a specific commodity, or several commodities. Depending on where in the production process the company operates, different levels of exposure to value changes in the commodity are created. This includes, for example, prospecting, exploitation, and distribution. This category includes Swedish companies such as Holmen (forest), Boliden (mining), and Lundin Energy (oil, gas). The advantage of stocks is that the company's value is affected by both the commodity price and its economic development. In some cases, this can lead to higher returns. However, a higher commodity price does not always mean the company is valued higher. CFDs Widest range of commodities With or without leverage CFDs are contracts whose value follows the value change of the underlying asset. They are traded on CFD platforms such as eToro and IG. CFDs can generally be traded with or without leverage and are offered with a very wide range of underlying assets. The advantage of CFDs is flexibility. It is possible to speculate on price increases (go long) or decreases (go short), and trading can be done with or without leverage. Another advantage of CFDs is that exposure can be gained to a larger number of commodities than offered by stockbrokers like Avanza and Nordnet. Read more about CFDs CFDs can be easily traded at Etoro.com/sv and IG.com/sv. These are the CFD brokers and platforms we at Aktiekunskap use ourselves. Options With leverage More complex security Options trading is offered on several different commodities. A call option gives the buyer the right, but not the obligation, to buy a commodity at a predetermined price on a predetermined date. This allows companies planning larger purchases to use options to secure future purchase prices. It is also possible for individuals to speculate on price increases/decreases in options, meaning the underlying asset never needs to be purchased. The advantage of options is, among other things, the significant leverage effect that can be created. However, pricing an option is a significantly more complex calculation than, for example, mini-futures, CFDs, and Bull & Bear certificates. If trading with leverage is desired, there are securities with simpler and clearer calculations of value development. Read more about options Commodity options can be easily traded at IG.com/sv Owning the Commodity as an Asset Have the asset at home More expensive and more complicated trading Some commodities can be purchased as real assets. This primarily applies to gold and silver, which are delivered in small bars to the buyer via registered mail. Compared to the total trade in silver/gold, this occurs on a very small scale. It is simply faster, easier, and cheaper to buy securities instead. One advantage is full access to the commodity, and it does not require reliance on the trading platform that offers the trade. Mini-futures Clear pricing High levels of leverage Mini-futures are securities traded with linear leverage – suitable for both short-term and long-term trading. For example, if the leverage is x5, approximately 40 SEK is paid for an asset with a market value of 200 SEK. Mini-futures always have a Knock-out level, meaning the entire holding is lost if this level is reached on the underlying asset. In the example above, this level would be around 160 SEK. The advantage of mini-futures is their clear pricing and the ability to trade with leverage without any collateral requirement. Read more about mini-futures Mini-futures can be easily traded at Avanza.se. See all mini-futures at Avanza Bull & Bear Certificates Clear pricing With or without leverage Not for long-term investment Bull & Bear certificates are a simple way to invest in the price of a commodity – with or without leverage. It is also possible to go long (Bull) or short (Bear) on the investment. The value of these certificates follows the daily percentage change in value of the underlying commodity. For example, if copper goes up 2%, Bull Copper X5 will go up 10%. This is primarily suitable for short-term trading and not as a long-term investment in commodities (due to the erosion effect). The advantage of Bull&Bear is primarily that it exposes you to the daily volatility of a commodity. If you wish to hold the position for a longer period, Mini-futures are better (see above). Read more about Bull & Bear certificates Bull & Bear certificates can be easily traded at Avanza.se. See all Bull & Bear certificates in commodities at Avanza Funds Risk diversification Can track indices Actively or passively managed Commodity funds consist of shares in several different companies within the commodity sector. The primary difference between the various funds is their focus. This can be, for example, a focus on companies in the mining, oil, or agricultural sectors. An advantage of funds is the risk diversification that occurs, while active management means that companies are selected by individuals specifically focused on this market. Examples of commodity funds include Atlant Green Tech Metals (primarily precious metals) and BGF World Mining2 (mining sector). Read more about funds Funds can be easily traded at Avanza.se. See Avanza's selection of commodity funds. ETFs ETFs are exchange-traded funds that can be composed of everything from stocks and commodities to other funds (fund of funds). There is also the possibility to go long or short, and trade with leverage, on several of these funds. Both the selection and trading opportunities are therefore greater than classic equity funds. An advantage of ETFs is that the holdings can consist of several different assets. Thus, an ETF can, for example, completely track the value of gold or a commodity index. An example of an ETF in commodities is Lyxor MSCI World Materials, whose holdings track the MSCI World Materials Index. This index is composed of over 120 commodity companies in over 20 countries, primarily focusing on large companies and the American market. Read more about ETFs ETFs can be easily traded at Avanza.se. See commodity ETFs at Avanza