Commodities help to create diversification in portfolios, providing access to a market which differs to equities and gilts. There are certain costs associated with commodities which are always taken into consideration by investors. These include storage - gold can be stolen and must ideally be stored in a vault. It’s also important to consider what you’re going to pay to insure them - ships sink, lorries crash, all problems which don’t affect gilt markets.
Finally, politics can play a huge part. Take the Russia-Ukraine conflict which accelerated a global energy crisis in 2022. Take oil by way of example. In 1999, oil bottomed at around $10 per barrel and it reached an all-time high of $147 in 2008, on the eve of the financial crisis.
Commodities have struggled since June 2022. The Dow Jones Commodity Index – which tracks a basket of energy, metals, and agricultural commodities – is down by almost 25%. That said, in terms of supply and demand, there are several reasons why investors are drawn to this sector. First and foremost, there are several longer-term thematic trends that remain supportive of commodities. Climate change is another tailwind - the continued reluctance to invest in new fossil fuel projects will create tighter supplies and the energy transition will require large amounts of metals such as copper. India’s population is also booming (particularly its middle class), recently overtaking China and after a long period of under- investment, there’s good reason to think another commodity cycle is on the horizon.
For a portfolio to gain exposure to this sector it’s possible to invest either through individual companies or through a fund manager, who will buy shares linked to a commodities market such as the price of gold or silver, or even baskets of soft commodities.
Commodities are often considered for investment when creating a diverse portfolio. For more information, your Investment Manager is available to discuss the allocated investments and performance of your bespoke portfolio as required.
The value of your investment can fall as well as rise in value, and the income derived from it may fluctuate. You might get back less than you invest.