WHY YOU SHOULD INVEST IN THESE COMMODITIES TODAY

What is a commodity?

Commodities are products that are almost identical no matter where they are extracted or grown. Most of them are also the raw materials that feed the economy. They can be broken down into energy commodities (like oil and gas), agricultural commodities (like cotton and corn), and metals (like copper and gold).

There are no sure bets when it comes to commodities, so you should always diversify your investments across a handful of different assets. Traders should stick to crude oil and gold which both have good trading volumes and plenty of volatility. Investors can consider some of the following options.

Gold

The gold price has already had a strong run in 2019, and it’s possible that it will experience a correction before the end of the year. For that reason, you may want to wait for a correction, but also be ready to buy a breakout of the 6-year high around $1,453.

So why gold and why now? Gold will benefit if the USD weakens, and it will also benefit if there is increased market volatility or an escalation of tensions in the Persian Gulf. The dollar has had a very strong run since the trade war began. But now that it looks like the Fed may cut rates, that strength may end. If the trade war ends, that would also likely lead to USD weakness. A global recession would also probably end the trade war (USD weakness again) and would probably lead to market volatility.

Gold has been a poor performer over the past decade, with the result that it is under-owned. That means the higher it goes, the more it is likely to attract buyers.

Crude Oil (West Texas Crude and Brent Crude)

Oil prices began recovering in 2018 and then corrected suddenly toward the end of the year. Brent Crude has since recovered to $62 and West Texas to around $55. Over time demand for oil will continue to grow and inventories will fall. This should lead to price appreciation at some point in the next 18 months. Again, there are no sure bets when it comes to commodities but for oil, the downside is to an extent limited. Lots of producers have production costs between $40 and $50, which means that if the price falls much further, supply will begin to fall. If the price falls, OPEC will probably also cut supply to support the price.

Soybeans

The trade war has not been good for soybean farmers in the US. Going back further, the price of soybeans has been under pressure since 2012. However, low soybean prices have also prompted farmers to plant less and switch to other crops. At the same time, long term demand for soybeans should improve as more consumers move away from meat. This means that the downside is limited, and a new bull trend should begin in the next two years.

Alternatives for commodity investors

For those wanting diversified exposure to commodities, there are two other options. Firstly, ETFs (exchange traded funds) that track commodity indexes are a great way for investors to own a basket of commodities.

The Invesco DB Commodity Index Tracking Fund (DBC) tracks an index of 14 different commodities. Nearly 50% is invested in energy commodities while 25% is invested in agricultural commodities. Industrial and precious metals make up the remainder. This is a good option for long term investors but has relatively low exposure to gold.

Another option is the iShares S&P GSCI Commodity Indexed Trust (GSG). This fund is similar but has higher exposure to energy and very low exposure to precious metals.

The other alternative is to buy into diversified mining companies. These companies are very large and are diversified across several commodities and regions. BHP (BHP) and Rio Tinto (RIO) are the two largest mining companies in the world and the best commodity stocks to invest in. Both earn most of their revenue from iron ore, followed by copper and aluminium. BHP also has exposure to oil and coal. These companies are one of the best ways to invest in global industrial growth and especially in China’s growth.

To learn more about commodities or to start trading online, open a live account in three easy steps with One Financial Markets today.