Why You Shouldn’t Ignore Investing in Commodities

Investors can help reduce risk, hedge against inflation and diversify their portfolio by investing in commodities, such as gold, silver and copper.

Gold, silver and copper bars all lined up.
(Image credit: Getty Images)

Investors are regularly searching for ways to maximize returns while minimizing risk. One often overlooked avenue for achieving this balance is investing in commodities. In my opinion, maintaining a certain percentage of a portfolio in commodities can increase diversification and reduce the risk of the overall portfolio. Let's explore the reasons why investing in commodities should not be ignored.

What are commodities?

Commodities are tangible assets of raw materials or agricultural products that can be bought and sold in standardized quantities. Commodities range from precious metals to energy resources like oil and natural gas and even include agricultural products like corn and wheat. While we are still likely buying stocks (“paper”), investing in commodities means buying an interest in companies that mine or manufacture or grow tangible goods.

Whether it’s food, minerals or lumber, all these goods are commodities that trade on the market. So, when we are investing in a company that supplies a commodity, we not only want to study that company’s fundamentals, but we also want to understand the supply and demand characteristics of the underlying commodity.

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We can likely agree on the continued demand for electric vehicles and the movement toward electrification as the world progresses toward a more renewable energy base and away from fossil fuels. Of course, this will not happen overnight — it will take time — but there is an undeniable demand for goods that support the electrification theme.

Well, what metal is crucial in all things electric? Read on to understand the opportunities that exist with commodities and how they allow us to tap into the fundamental drivers of the global economy.

How to invest in commodities

The typical investor cannot just go out and buy a pound of copper, a brick of gold or a bushel of corn or soybeans and trade it, although I suspect some have tried. Luckily, the minds on Wall Street have developed various methods and vehicles that can be utilized by investors to express interest or exposure in a series of commodities or a specific one.

You can invest in commodities through various instruments such as funds, ETFs or futures contracts that allocate the capital under their management to various commodities or companies in the commodity sector. Each method has its own advantages and considerations, and investors should carefully evaluate their risk tolerance, investment objectives and available resources before making a decision.

The revenues and likely prospects for growth of these investments are determined by the price of the underlying commodity. It is important to understand that many commodities are traded on the futures exchange, where there are contracts for purchase at a certain time at a certain price. Given that, there are specific risks that investors need to understand before investing in such vehicles.

Things to be aware of when investing in commodities

While there are numerous advantages to investing in commodities, it's essential to be aware of the associated risks and considerations. Commodities can be highly volatile, and market trends and timing can greatly impact their performance.

Additionally, global events such as geopolitical tensions or natural disasters can impact commodity prices. Careful monitoring and regular analysis are necessary to navigate these complexities successfully. If you work with a financial adviser, this is something they will be doing on your behalf.

Benefits of commodities

Including commodities in an investment portfolio offers several notable benefits. Firstly, commodities have historically exhibited a low correlation with traditional asset classes like stocks and bonds. This means that when other investments decline, commodities may provide a cushion against losses.

Secondly, commodities have the potential to act as a hedge against inflation. As prices rise, the value of commodities often increases, providing a valuable store of wealth.

Lastly, in certain market conditions, commodities can offer attractive returns due to supply and demand dynamics.

Highlighting gold, silver and copper

When considering specific commodities, gold, silver and copper stand out as compelling investment options. Gold has long been regarded as a safe-haven asset, maintaining its value even during times of economic uncertainty. Silver also offers similar hedging benefits and has industrial applications as well. Copper, known colloquially as the “red metal,” is a vital component in infrastructure development, making it an attractive option as economies grow and demand for construction materials rises.

Given its tendency to predict the changing economic winds, copper is the element that is required in all electric functionality. CNBC reported that demand for copper could nearly double by 2035, and mining companies are having a hard time keeping up. Copper’s role in energy transition has led to bullish bets on the metal, but at the same time, multiple forces in politics and the market are making moves that could destroy demand.

Commodities: An alpha-generator

In an inflation-centric economy, having exposure to commodities is likely an alpha-generator, providing further excess returns over time. By including commodities, such as gold, silver and copper, in your portfolio, investors can potentially reduce risk, hedge against inflation and tap into unique market opportunities. However, it's crucial to stay informed, understand the risks involved and continually reassess your investment strategy.

As you explore the world of commodities, remember to speak with your financial adviser about your financial goals and risk tolerance. Investing in commodities should not be overlooked as a viable strategy for diversifying and balancing your investment portfolio.

ALINE Wealth is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. ALINE Wealth and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. ALINE Wealth and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS®
CIO and Founder, ALINE Wealth

Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS®, is the Chief Investment Officer and Founder of ALINE Wealth, a wealth management firm that specializes in providing clients with financial planning advice for every stage of their lives. Along with Peter’s deep financial wisdom, he adds considerable acumen in philanthropy, helping clients navigate family trusts, institutions, and nonprofits.