How to invest in commodities: Ways to invest in 2024

Incorporating commodities into a portfolio not only diversifies it but also serves as a hedge against price fluctuations in various industries. Energy (e.g., oil, gas, coal), agricultural (e.g., corn, soy, canola, pork, beef), and metal (e.g., gold, silver, copper, platinum) products have clear market dynamics and straightforward financial instruments for trading. Unlike many financial assets influenced by market sentiment, commodities offer a more direct investment experience based on market demand and processing requirements. This article examines major commodities and their suitability for meeting investment objectives.

Investing in commodities: Strategies and approaches

Futures contracts

Futures contracts offer direct exposure to commodity prices, allowing investors to buy or sell a specified amount of a commodity at a predetermined price and date in the future. Leveraged margin accounts enable investors to take larger positions, with contracts typically settled in cash, eliminating the need for physical delivery. Opening a futures trading account often requires additional paperwork and higher account minimums, with maintenance margin requirements varying based on contract value.

Physical ownership

Investing in physical commodities, particularly precious metals like gold and silver, involves purchasing bullion in standardized forms. However, storing and insuring these metals can pose challenges, and other commodities may have storage and shelf life limitations, making physical ownership less common among investors. To engage in physical commodity trading, investors need to find reputable dealers and possibly secure storage facilities.

Mutual Funds, Exchange Traded Funds (ETFs), and Exchange-Traded Notes (ETNs):

Exchange-traded products like commodity-based mutual funds, ETFs, and ETNs offer avenues for commodity exposure. These products can focus on individual commodities, pooling investor funds to invest in a commodity pool according to fund specifications. Investment strategies may involve purchasing futures, options on futures, shares in sector companies, or physical commodity storage. Some funds employ leverage to amplify price movements, potentially offering double or triple the commodity's price changes. It's essential to review fund disclosures prior to investing to ensure the offered exposure aligns with investment objectives.

Individual securities

Accessing individual securities linked to commodity production or processing is possible through a standard brokerage account. By utilizing a stock screener and targeting companies in the basic materials or energy sectors, investors can identify relevant opportunities. However, investing in commodity-related companies typically requires some industry-specific knowledge for success. For instance, mining and energy extraction firms conduct thorough feasibility studies on reserves, influencing their stock values. Larger companies with diverse global reserves and development stages are less impacted by individual feasibility studies, whereas smaller firms may experience heightened price volatility based on study outcomes.

Alternative Investments in commodities

Commodities, alongside assets like real estate, are classified as alternative investments due to their unconventional trading nature compared to stocks and bonds. Within the realm of precious metals, there exists a subset of alternative investments that resemble collectibles rather than typical investments. Bullion coins and jewelry possess aesthetic and historical value, often trading at a premium to the metals' melt prices. While these physical investments can appreciate in value, their prices are less influenced by market fluctuations. Purchasing jewelry from stores or coins directly from the Mint or dealers is more akin to collecting than traditional commodity investing.

Requirements for opening a brokerage account

To initiate the process of opening a brokerage account, individuals are typically required to furnish personal and financial details and respond to basic inquiries.

Personal information

This includes:

• Name, address, and contact number
• Tax identification number, usually the Social Security number
• Date of birth and government-issued identification
• Banking details for account funding
• Level of investment expertise and risk tolerance (often assessed through Know Your Client (KYC) questions)

With online brokerage platforms, the initial step usually involves creating an account (email and password) with the broker, followed by the submission of additional details during the onboarding procedure.

Minimum deposits

While numerous brokerage accounts have zero account minimums, enabling futures trading within a margin account generally necessitates holding at least a few thousand dollars with the broker. The actual capital required to trade may exceed the minimum deposit, depending on the contracts being traded. Initial and maintenance margins for futures accounts may vary based on the account type, whether individual retirement account (IRA) or non-IRA.

Essential requirements for setting up a gold IRA

Gold individual retirement accounts (Gold IRAs) serve as a form of commodity investment tailored for retirement purposes. Unlike traditional IRAs, Gold IRAs necessitate securing a custodian to manage the physical assets. Setting up a Gold IRA involves several key steps:

• Establishing a self-directed IRA: Begin by creating a self-directed IRA, which offers the flexibility to invest in alternative assets like gold.
• Selecting a custodian: Choose a custodian to oversee the Gold IRA account and manage the physical gold assets.
• Choosing an approved depository: Select an approved depository to securely hold the gold assets on behalf of the Gold IRA.
• Choosing a broker/dealer: Identify a broker/dealer through whom you will purchase the gold for the Gold IRA. Some Gold IRA providers offer integrated services or refer clients to affiliated providers.

Requirements and documents:

• Personal information: Provide standard personal information required for investment accounts, including name, address, contact details, tax identification number (typically Social Security number), date of birth, government-issued identification, and additional Know Your Client (KYC) questions.
• Minimum deposits: Gold IRA minimum deposits are typically higher due to the substantial value of gold. While the IRS does not specify a minimum, approved coins and bars must meet certain criteria. While some Gold IRAs may not advertise a minimum, practical amounts typically start at around $2000. However, certain Gold IRAs may have minimums ranging from $10,000 to $60,000.

Pros and cons

Customer support

Brokerages can differ significantly in their customer support offerings. While many still provide traditional phone and email support, some have integrated in-platform chat and social media channels. Conversely, a few brokers have adopted digital-only customer service models, relying on FAQs and email contact forms. It's essential to ensure that your preferred communication method is supported by the broker's customer service options.

Minimum investment requirement

While we appreciate brokers with low minimum deposits to foster investment participation, futures trading demands a substantial capital base to establish a margin account and withstand potential market fluctuations without significant portfolio losses. Commodities investing is inherently risky and should only constitute a portion of your investment portfolio, with the bulk of your investments allocated elsewhere.