Diversification is the cornerstone of a robust investment strategy, offering protection against market volatility and potential downturns. 

While stocks and bonds have traditionally been the mainstay of diversified portfolios, commodity investments present a compelling opportunity to further enhance diversification and potentially boost returns.

What Are Commodities?

Commodities are raw materials or primary agricultural products that are traded on exchanges. They can be categorised into four main groups: energy (such as crude oil and natural gas), metals (including gold, silver, and copper), agriculture (such as corn, wheat, and soybeans) and livestock (including cattle and hogs). There are specific commodity traders, who will often be recruited by commodity headhunters covering each area of commodities. These traders will be employed by the likes of trading houses to operate.

Unlike stocks and bonds, which represent ownership or debt in a company, commodities are physical assets with intrinsic value derived from their utility and scarcity.

What Are the Benefits of Diversification?

Including commodities in your investment portfolio can provide several key benefits:

Low Correlation to Traditional Assets

One of the primary advantages of commodities is their low correlation to traditional asset classes like stocks and bonds. While the performance of stocks and bonds is influenced by factors such as economic conditions, interest rates, and corporate earnings, commodities often move independently, driven by supply and demand dynamics specific to each market. This low correlation can help reduce overall portfolio volatility and enhance risk-adjusted returns, especially during periods of market stress.

Inflation Hedge

Commodities have long been regarded as an effective hedge against inflation. When prices rise, the value of commodities tends to increase as well, since they represent tangible assets with intrinsic worth. For example, during periods of high inflation, the prices of energy commodities like oil and gas typically surge, reflecting increased production costs and higher demand. By including commodities in your portfolio, you can help preserve purchasing power and mitigate the adverse effects of inflation on your investment returns.

Portfolio Diversification

Adding commodities to a diversified investment portfolio can enhance diversification by introducing assets with unique risk and return characteristics. 

While stocks and bonds are subject to market and credit risk, commodities face distinct risks such as geopolitical instability, weather-related disruptions, and supply chain constraints. 

By spreading your investments across different asset classes, you may reduce the concentration risk associated with any single market or sector, potentially improving overall portfolio resilience and performance consistency.

How Can I Invest in Commodities?

There are several ways to invest in commodities, each offering different levels of exposure and risk. With increasing access to internet and broadband around the world, there are various ways in which to invest in commodities, but whichever way anyone seeks to invest, they should always understand the risks before investing.

Futures Contracts

Futures contracts allow investors to buy or sell commodities at a predetermined price on a specified future date. Futures trading provides direct exposure to commodity prices and allows for leveraging and hedging strategies. However, it also involves significant risks, including price volatility and margin calls, making it more suitable for experienced investors and institutional traders.

Exchange-Traded Funds (ETFs)

ETFs offer a convenient way to invest in commodities without the complexities of futures trading. These funds track the performance of commodity indexes or hold physical assets directly, providing diversified exposure to multiple commodities within a single investment vehicle. ETFs are typically more liquid and accessible to individual investors, offering flexibility and transparency in portfolio management.

Commodity Stocks

Investors can also gain exposure to commodities through stocks of companies engaged in commodity production, exploration, or distribution. For example, investing in oil and gas companies provides indirect exposure to energy prices, while agricultural stocks are influenced by crop yields and commodity prices. While commodity stocks may offer the potential for capital appreciation and dividend income, they are also subject to company-specific risks and market fluctuations.

Gold is one of the longest-standing assets in the history of human investment. The asset has long been a store of value for hedging the economy. For some time, gold was even the basis for the US dollar’s value. However, a new asset has come into play: Bitcoin.

Considered by many to be digital gold, the next step in the precious metal’s history, investing in Bitcoin is debatably a good idea. If you’re unsure as to which is the best place to put your money, this guide is for you. We’ll break down the pros and cons of each investment, ensuring you know just where your funds should go. That, and we’ll establish the best places for you to invest in such assets.

Investing in Gold in 2021

Long-term investors might recommend still investing in gold. It’s what they know, after all, and it’s what made them successful in the past. They’re not entirely wrong, either.

For one, gold is still a reliable asset. It’s not too volatile, nor is gold going anywhere anytime soon. There are multiple ways to invest in it, as well.

Online gold exchanges, for instance, allow you to invest anonymously and with just a debit or a credit card. You simply have to create an account on the exchange and go from there. You can purchase the assets on the exchanges without much trouble, thanks to their various trading methods. They also allow you to hold the assets in a wallet - much easier than storing them with traditional gold.

Otherwise, investing in gold is expensive. You’ll need enough funds to afford a whole unit of the metal to start. On top of this, you’ll need to pay extra in vendor and convenience fees. Then you have storage fees.

Gold is still a reliable asset. It’s not too volatile, nor is gold going anywhere anytime soon.

Storing gold is pricey. You can’t just keep it in your home. You need a safe to put it in. Safes can be expensive, though they’re worth it to protect your investment. Otherwise, you can pay a monthly fee to store it in a third-party space. However, note that you’re putting control of your assets in someone else’s hands if you do so. This is also an endlessly recurring cost on your investment.

Also, while gold is a fantastic stable investment, it’s not a great one for short-term profits. Sure, the asset may rise in the long-term, especially when considering the global economic climate, but otherwise, it stays around the same price. It could be years before you see a significant profit on your gold investment.

If you’re risk-averse, then this is great news for your investment personality. Otherwise, you may want to put funds elsewhere.

Investing in Bitcoin in 2021

Bitcoin is based on a blockchain. There’s no intermediary to go through, meaning transaction fees are much cheaper than otherwise. It’s also a global currency, allowing you to convert Bitcoin to any fiat, and vice versa, no matter where you are in the world.

On top of this, there is a limit on Bitcoin. There can only ever be 21 million of the asset, preventing inflation that fiat currencies are susceptible to. No one can create more Bitcoin - only that which is in the market can be traded. Bitcoin is verified by miners, users that take advantage of their computer’s power to ensure there isn’t any double-spending or similar bad activities.

Becoming a miner is difficult, but they are rewarded handsomely in Bitcoin. The more miners that are out there, the more Bitcoin that is put into circulation. Over time, this makes the asset less rare, eventually causing the price to stabilise. However, note that getting in early, assuming the asset is successful, would mean holding such a rare asset once it stabilises.

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Speaking of stabilisation, Bitcoin is much more volatile than gold. The price has gone up or down by the thousands in just a day, throwing off many investors. Those who aren’t a fan of risk might want to heed this activity. Of course, this is great for short-term profit if you’re smart. The long-term prospects of Bitcoin are yet to be decided.

Conclusion

Now you’re aware of both Bitcoin and gold. Decide which is best for your investment portfolio in 2021. That way, you’ll be better off in the future with your funds.

The price of crude hit its highest level since the beginning of the COVID-19 pandemic on Monday after Yemen’s Houthi forces targeted Saudi oil sites with drones and missiles over the weekend.

The storage tank that was the target of Sunday’s attack was the largest crude terminal in the world, capable of exporting around 6.5 million barrels per day, representing almost 7% of global demand for oil. Though the Saudi energy ministry confirmed that no injuries or property damage occurred in the attacks, and output appeared to be unaffected, the shock prompted a crude price surge.

Brent crude rose as much as 5% to its highest level in 14 months before easing slightly, while BP and Shell also rose higher on opening. Though Brent crude retreated to $67, it subsequently rose back to $69 by 10:14 GMT on Tuesday morning, while West Texas Intermediate rose 41 cents to $65.46.

Stephen Innes, chief global markets strategist at Axi, attributed the price surge to the possibility of supply disruption over the weekend. “With OPEC pursuing a tight oil policy and US Shale Oil inelastic supply response to higher prices, any disruption to the Middle East supply chain could shoot oil prices considerably higher,” he said.

The focus on supply follows last week’s OPEC+ meeting, in which the organisation agreed to maintain their supply cuts for April.

Pundits predict that this decision could have a long-lasting impact on oil prices in the months ahead.

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Oil prices have also benefited from expectations of global economic recovery after the US Senate passed a $1.9 trillion stimulus package, which US Treasury Secretary Janet Yellen hailed as sufficient to fuel a “very strong” recovery in the US.

The price of oil rose on Monday as US output slowly began to return after being cut by frigid conditions in Texas, showing the continued tightness of supply as demand sees an uptick from the sharp decline caused by the COVID-19 pandemic.

Brent crude rose 0.9% to $63.46 per barrel by 07:42 AM GMT, following a gain of almost 1% last week. US oil also rose 0.8% to $59.71 per barrel after last week’s 0.4% slump.

Prices were boosted further with Goldman Sachs’s announcement that it was raising its Brent price forecast by $10, with expectations for the price to reach $70 by Q2 and $75 by Q3.

“We now forecast that oil prices will rally sooner and higher, driven by lower expected inventories and higher marginal costs - at least in the short run – to restart upstream activity,” analysts at Goldman wrote.

Texas is home to 40% of the oil output of the US. Following the deadly winter storms that have brought the state to a standstill, the US government adjusted its production forecast down by 140,000 barrels per day to 7.16 million bpd.

The lack of a swift crude rebound in the US is likely to help OPEC and its allies to manage the market, though an OPEC source speaking with Reuters did not imagine that factor “will be permanent.”

OPEC is slowly winding down the record output curbs it imposed last year as both oil prices and demand buckled under the pandemic. Members of the alliance will meet on 4 March to review demand as it stands, though the organisation does not expect to see a repeat of 2020.

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“US shale is the key non-OPEC supply in the past 10 years or more,” another OPEC delegate said. “If such limitation of growth is now expected, I don’t foresee any concerns as producers elsewhere can meet any demand growth.”

Oil prices hit one-year peaks on Friday amid hopes for a quick economic revival and a commitment by the Organisation of the Petroleum Exporting Countries (OPEC) and its allies to restrain the supply of crude.

Brent crude futures reached $59.41 per barrel, a high not seen since 20 February 2020. Brent is currently on track to gain around 6% this week.

US West Texas Intermediate (WTI) crude futures also rose 0.5% to $56.52 after previously reaching a peak of $56.52 per barrel, its own highest level since 22 January 2020 – and is on track to achieve a weekly increase of 8%.

The backwardation of both benchmarks, where contracts for near-term delivery are more expensive than later supplies, reached their highest level in over a year at $2.30, showing expectations of tighter supply in the future.

The oil market has been shored up by supply restrictions from OPEC+, which on Wednesday announced member states’ “high compliance” with agreements to limit oil supply, forcing up prices.

In a statement released following a meeting of its Joint Ministerial Monitoring Committee on 3 February, OPEC said that countries had held back production by a total of 2.1 billion barrels since April 2020, when the market suffered an unprecedented shock. A combination of the dawning COVID-19 pandemic and a price war between Russia and a Saudi-led coalition drove prices to historically low levels, with futures even turning negative for a brief while.

“The committee welcomed the positive performance of participating countries,” OPEC said. “Participants pledged to achieve full conformity and make up for previous compensation short-falls, and stressed the importance of accelerating market rebalancing without delay.”

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Government data also released on Wednesday showed that US crude oil stockpiles unexpectedly fell to 475.7 million barrels last week, their lowest level since last March.

Silver soared as much as 11.2% to $30.03 an ounce during weekend trading, its highest level since February 2013, as a wave of small-time traders turned their attention to commodities.

Silver is only the latest asset to see a surge following the GameStop frenzy, where users in the Reddit community r/WallStreetBets piled into GameStop and other struggling retail businesses that banks and hedge funds had taken out paper bets against.

The commodity first came to the attention of the online group on Thursday when posts began circulating urging investors to buy silver mining stocks and ETFs backed by physical silver bars in another squeeze of short-sellers in the market. Demand for physical silver has more than doubled since then.

With value as both a safe-haven asset and an industrial metal, silver prices have risen by almost 19% since Thursday.

iShares Silver Trust ETf, the largest silver-backed exchange-traded fund, saw its silver holdings jump by a record 37 million shares between Thursday and Friday. Each share represents an ounce of silver. Total silver holdings by all major ETFs reached a record 912 million ounces during the week, up from just over 600 million at the same point in 2020.

Silver ranked among the best-performing assets last year, gaining nearly 50%. Analysts speculate that its good fortunes will continue this year as favourable policies in the US boost it further.

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However, while silver prices could test $35 to $38 an ounce in the near term, “once the storm calms, prices will come back to normal levels around $26-$27”, Anand Rathi Shares’ commodities analyst Jigar Trivedi predicted.

On the heels of Election Day, capping one of the most contentious presidential election cycles in US history, markets have been roiled by the combination of an unclear victor – with millions of absentee ballots yet to be counted across several key states – and a premature claim by President Donald Trump that he had won the race.

European markets reversed their gains from Tuesday, when investors had been betting on a clean victory for Democratic presidential nominee Joe Biden. The FTSE 100 lost 1.1% as trading opened, with the CAC 40 and DAX falling 1.4% and 1.9% respectively. Yields on popular bonds also slipped as investors took refuge, with demand rising for US Treasuries and German Bunds.

Wall Street futures fell following Trump’s comments on Wednesday morning, but quickly recovered. The S&P 500 gained 0.5% while the Dow Jones lost 0.2%, and the tech-focused Nasdaq jumped by 2.5%.

“The polls are proving wrong again,” said Giles Coghlan, Chief Currency Analyst at HYCM, pointing to the near certainty of a contested election in accounting for markets’ new uneasiness. “As we are already seeing this morning, the Dow Jones and US Dollar will be in a volatile state until there is a clear outcome that both parties will accept.

“US stocks are selling off on the uncertainty, reversing the gains expected from a Biden victory as projected by the polls. This will also have significant ramifications on the performance of other major currencies and assets. So long as the uncertainty remains, I’m expecting investors to sell global equities, and their holdings in currencies like the Euro and US Dollar. At the same time, we should see inflows into the Japanese Yen.”

Giles also remarked that there are still reasons to be optimistic in the medium and long term. “Regardless of who is the next US President, the coming US stimulus bill should lift US stocks, once we have a winner confirmed,” he said. “Furthermore, over the medium term, even if gold sinks a little lower on a firmer US Dollar, the price of this safe haven asset should still rise in the coming months and into 2021. Low interest rates are projected to remain unchanged for the next three years by the Federal Reserve, and the large quantitative easing program will support the longer-term appeal of gold.”

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Nigel Green, founder and chief executive of deVere Group, urged investors to exercise caution as the results of the election are challenged in court. “This monumental uncertainty in the world’s biggest economy is going to send global stock markets into a tailspin as investors get rattled about a clear outcome taking longer to reach than they hoped,” he said.

The CEO added that renewables, industrials and cyclical stocks are likely to perform well under a Biden administration, while the oil and gas, financial and healthcare sectors will likely do better under Trump.

“History shows stocks tend to rise regardless of which party controls the White House, but it matters how your portfolio is balanced,” he said. “Therefore, investors should sit out the temporary volatility until the picture becomes clear.”

Oil prices rose on Tuesday as disruptions in Norway and the Gulf of Mexico, as well as President Donald Trump’s early return to the White House, buoyed investor enthusiasm.

Brent crude surged by at least 0.1% to around $41 per barrel during early trading in London, with the crude oil spot pricing also rising by 0.1% to around $39 per barrel during the same period. West Texas Intermediate (WTI) was also trading 1.52% up.

These increases follow on from gains seen on Monday, where WTI rose by 6.15% after the release of positive reports regarding the health of President Trump following his COVID-19 diagnosis.

The new gains also coincide with news that Trump had left Walter Reed Medical Centre and returned to work at the White House, amid other reports that US Hose Speaker Nancy Pelosi and US Treasury Secretary Steven Mnuchin had held further talks on potential stimulus deals and agreed to continue negotiations on Tuesday. Both events contributed to resurgent optimism for oil and other markets.

In addition to this, the Norwegian Oil and Gas Association have estimated that an oil workers’ strike will cut Norway’s total output capacity bye equivalent of over 330,000 barrels of oil per day – about 8% of total production.

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“Besides Norway, there could also be production outages in the Gulf of Mexico this week, where another hurricane has developed,” Commerzbank noted in a statement.

The initial shock of the COVID-19 pandemic caused WTI crude oil prices to fall to negative values for the first time during April as a concurrent pricing war between Russia and a Saudi-led coalition saw global supply far outstrip demand. As events like the Norwegian strike and the Gulf of Mexico hurricane reduce supply, investor optimism for oil generally returns.

Oil prices fell sharply during Monday trading after a steady decline that has now continued for two weeks, owing in large part to investor fears of further lockdown measures in response to a surge in the spread of COVID-19.

Come morning trading on Tuesday, it became apparent that oil was holding its losses. Crude hit around $39 per barrel at 8:45 am in London, while Brent sat at around $41 following a 4.5% drop in price on Monday. Both losses stemmed from a broader market sell-off.

The price shock follows the reimplementation of lockdown measures in the UK in response to rising coronavirus cases, with Cabinet Office minister Michael Gove advising that Brits should work from home “if possible” to avoid spreading the virus further. Local lockdowns have also come into effect in the Madrid region since Monday, affecting nearly a million people, and the rate of infection is currently rising in France, Belgium and Lebanon.

During the height of the “first wave” in March and April, when lockdown measures were at their most severe, oil prices fell to their lowest level ever seen – West Texas Intermediate even dipping below 0% for the first time in history as demand for oil ran dry.

In addition to the growing possibility of new lockdown measures, Saturday also saw an announcement from the Libyan National Petroleum Company that it would restart its production and exportation of oil, potentially sparking a supply glut.

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Last week, oil giant BP’s influential annual energy report said that demand for oil may never fully recover from the impact of COVID-19, and that “peak oil” may now be past. The company has already begun to transition away from fossil fuels and toward a carbon-neutral energy infrastructure.

Benchmark oil prices reached their highest level in five months on Wednesday as hundreds of US offshore oil facilities were closed in preparation for the arrival of Hurricane Laura.

310 facilities in the Gulf of Mexico were evacuated, effectively halting 84% of oil production in the Gulf – equivalent to a loss of 1.56 million barrels per day – and at least a third of synthetic rubber capacity in the US. The scale of the shutdown is comparable to the 90% production outage caused by Hurricane Katrina in 2005.

The news pushed oil futures contracts to their highest prices since early March, before the US and other nations first implemented lockdown measures in response to the COVID-19 pandemic.

Brent crude rose 0.4% to $46.05 per barrel in early Wednesday trading, and West Texas Intermediate rose 0.2% to $43.43 per barrel.

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According to Reuters, AxiCorp’s chief global markets strategist Stephen Innes commented: "Markets are currently pricing in a possible near-term catastrophic gasoline shortage."

Hurricane Laura is expected to make landfall on Thursday near the Texas-Louisiana border, where many petrochemical plants and refineries are situated. The National Hurricane Centre predicts that it will be a major hurricane with wind speeds of at least 111 miles per hour by time of landfall.

Hamzah Almasyabi, co-founder and CEO of the gold-buying platform Minted, outlines the benefits and drawbacks of adopting an investor trading app.

Some of the best-known investment apps, such as Freetrade, Trading 212, Plum and Moneybox, have reported a strong uptick in customer numbers since the start of March, when the UK Government’s lockdown restrictions were imposed. However, in truth, consumers had become more interested in managing their own finances online well before the pandemic. Some platforms have noticed more interest, particularly from younger online investors, who are attracted by the familiarity and gamified nature of the latest investment platforms across a range of asset classes. Equally, older people or more experienced online investors have been exploring ways to make their money go further, sometimes with a view to bringing forward their retirement.

The convenience and simplicity of many new generation investor trading apps is helping to democratise the world of investor trading. It is allowing people to invest in stocks and shares, or precious metals and other commodities, using their mobile phone, while sitting at their own kitchen table. Of course, there are risks but there are also incredible opportunities for people who want to get involved.

When considering investing online for the first time, it makes sense to try out various platforms before starting to invest actual cash. Some platforms offer newcomers a chance to spend virtual money, just to see how their investments might have fared in the real world. Such ‘try-before-you-buy’ services also allow users to test the app’s functionality and make sure it suits their preferences. However, convenience and user-friendly architecture shouldn’t be the main criteria when deciding where to invest for the first time. It makes sense to download a number of options, try them out and compare the terms and conditions of their offer carefully.

When considering investing online for the first time, it makes sense to try out various platforms before starting to invest actual cash.

In some cases, the precise nature of the investment opportunity may not be clear, particularly to the novice online investor. For example, some platforms may appear to be offering a chance to buy stocks and shares, when in fact they are just giving the investor exposure to any movement in the value of the shares. If the investor wants to own shares, this may not be the right option for them.

In a climate of significant stock market volatility, interest in ‘safe haven’ assets such as gold has increased significantly. While there are fewer gold-buying platforms to choose from, there are still some important differences to be aware of. Gold Exchange Traded Funds (ETFs) are popular with some individuals because they provide an easy way of gaining exposure to any increases in the value of gold, whilst still having easy access to the funds if they are needed. On the other hand, gold investors looking to the longer term may prefer to own a physical asset, which has intrinsic value in countries around the world. Buying physical gold can now be achieved without incurring excessive entry and exit costs, making it possible for people with modest amounts of cash to invest incrementally in this luxury asset for the first time.

Before becoming an online investor, individuals should take a step back and consider their personal and financial objectives, taking into account the amount of money they can afford to invest and their risk appetite. These factors will not only influence their choice of asset class, but the features they look for when considering different investment platforms. If any platforms appear to be downplaying risk, over promising returns, or pushing the investor to spend money within a certain timeframe, they should be treated with caution.

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As long as investors have taken the right steps to prepare themselves and understand the potential risks and rewards, online investing can be an empowering and enjoyable experience. What started as a new habit during the pandemic, could have a positive effect on financial wellbeing.

The price of gold reached a historic high on Wednesday, changing hands at $2,040 per ounce XAU= in early trading. The overnight surge means that the price of gold has now risen by more than 30% since the beginning of the year.

Gold has been boosted throughout 2020 by a combination of a weakening US dollar and mounting investor uncertainty in the health of the economy as the COVID-19 pandemic continues to push countries into recession.

Giles Coghlan, Chief Currency Analyst at HYCM, pointed to this investor uncertainty as a key reason for the surge in gold prices. “We know that investors rally to gold in times of uncertainty,” he explained. “The reason for this is simple – gold is a safe haven asset that is able to maintain, and indeed increase, its value during volatile periods.”

“Investors and wealth managers have been buying up gold due to their concerns over the global economy’s ability to effectively recover from the COVID-19 pandemic. The fact that private banks are encouraging their clients to buy gold as a means of hedging against inflation and currency fluctuations shows that the market is not confident that we have witnessed the end of the coronavirus outbreak.”

Coghlan also advised investors eyeing gold to be aware of the Volatility Index, which provides a 30-day projection of the volatility likely to be experienced by major gold markets. Drops in the VIX are normally followed by a rise in gold prices, and vice versa.