Commodities Investments: How to Participate in Raw Materials

Introduction: What are commodities?

Commodities are any basic, homogeneous, and tradable product produced in large quantities and traded on global markets. They are used for both direct consumption and industrial production.

They include:

  • Industrial metals: iron, copper, aluminum, nickel, lithium.
  • Precious metals: gold, silver, platinum.
  • Energy: oil, natural gas, coal.
  • Agricultural: wheat, corn, coffee, soy.

Investing in commodities means betting on the value of these resources, which depends on supply, demand, geopolitics, and climate factors. Unlike stocks or bonds, commodities do not generate dividends or interest, only gains or losses from price changes.

Ways to invest in commodities

  1. Physical purchase

    • Useful for precious metals (gold, silver) or certain agricultural products on a smaller scale.
    • Advantage: tangibility and direct control.
    • Disadvantage: storage, transport, deterioration (for food), and limited liquidity.

  2. Futures contracts

    • Agreements to buy or sell a quantity of a commodity at a fixed price in the future.
    • Used by companies for hedging and by investors for speculation.
    • Example: buy oil today at $80 per barrel for delivery in 6 months.

  3. Commodity ETFs

    • Funds that replicate the price of a commodity or a commodity index.
    • Example: USO (oil), GLD (gold), SLV (silver), SOYB (soy), WEAT (wheat), CORN (corn), etc.
    • Advantage: liquidity, no need to physically store the resource.

  4. Stocks of related companies

    • Buy shares of mining (copper, lithium, iron), oil, or agricultural companies.
    • Double risk: depends on both the commodity price and company management.

Strategies by investor level

Beginner

  • Invest in ETFs or shares of large mining/energy companies.
  • Avoid complex futures contracts at first.
  • Understand supply-demand dynamics and geopolitical factors.

Intermediate

  • Combine ETFs with small futures contracts to learn hedging.
  • Diversify among industrial metals, energy, and agricultural products.
  • Assess volatility risk: oil prices can drop 10% in days due to international conflicts.

Advanced

  • Trade with futures, commodity options, and metal/energy swaps.
  • Participate in mining or agricultural joint ventures.
  • Analyze macroeconomic fundamentals, climate, global production, and regulations.

Advantages and disadvantages

Advantages:

  • Hedge against inflation and currency devaluation.
  • Portfolio diversification.
  • Exposure to global markets and economic cycles.

Disadvantages:

  • High volatility, especially energy and industrial metals.
  • Leverage risk in futures and derivatives.
  • Do not generate passive income (except dividends from related companies).

Practical tips

  • Study global supply and demand: conflicts, climate, inventories, and industrial consumption.
  • Diversify among commodities: don’t concentrate everything in a single product.
  • Choose the right investment vehicle: physical, ETF, stock, future, or swap depending on experience.
  • Consider costs and fees: especially for futures and international ETFs.

Conclusion

  • Beginner: commodity ETFs or shares of large companies are the simplest way to start.
  • Intermediate: combine ETFs with small futures contracts and sector diversification.
  • Advanced: use derivatives, swaps, and joint ventures, analyzing macroeconomic, geopolitical, and climate factors.

Commodities offer exposure to the world’s essential resources, but require understanding of global markets and volatility risks. When well-managed, they can be a solid, diversifying complement to any investment portfolio.

It’s very important to diversify your portfolio to do it well—revisit the oracle to find out what else to invest in and how to do it right.

Glossary

Blue chips: established companies with decades of existence, billions in revenue, product diversification, consistent profits, cash reserves, and if they need financing, banks and markets lend to them because they trust their solvency.

Broker: a platform or financial intermediary that allows you to buy and sell stocks. Some brokers are international (e.g., Interactive Brokers, eToro), and others are local (depending on the country).

Call: a financial contract known as a derivative, whose value depends on a stock. It is the right to buy a stock at a certain price in the future.

Cap rate: capitalization rate, an indicator of the annual return of real estate investment.

Cash flow: monthly cash generated by the property after expenses (rent – taxes – maintenance).

Certificates of Deposit (CDs): "similar to fixed-term deposits, but usually issued by banks or financial institutions in more formal or international markets. They allow investing in local or foreign currencies. They may have fixed or variable interest options, depending on the contract.

Commodities: any basic, homogeneous, tradable product produced in large quantities and traded in global markets. They are used both for direct consumption and for industrial production.

Covered Call: investors holding stocks who sell “Call” options to generate extra income.

Covered bonds: bonds backed by specific assets, lower risk than regular corporate bonds.

ETF: an investment fund traded on the stock exchange like a stock.

Fixed-term deposits: depositing money in a bank for a set period in exchange for a fixed interest rate. At the end of the term, you recover your capital plus interest.

Futures contracts: agreements to buy or sell a certain quantity of an asset at a fixed price in the future.

Hedging: investing in stocks of other types such as precious metals or utilities to balance losses if company stocks fall.

High yield / junk bonds: small companies or those with liquidity problems, high risk, and high return.

Interest-bearing accounts: bank accounts that generate daily or monthly interest on the available balance.

Interest rate swaps: a financial contract between two parties to exchange interest payments on a notional principal. The most common swap is exchanging fixed rates for variable interest rates or futures.

Inverse ETFs: gain value when the index they track goes down.

Joint ventures: partnerships between two or more parties to develop a joint project, sharing risks, costs, and profits.

Leverage: using financing (mortgage or loan) to buy more properties than your capital would allow.

Leveraged ETFs: multiply market movements (2x or 3x), up or down.

Liquidity: in economics, liquidity is the ease with which an asset can be converted into cash without losing value.

Microcaps: very small cryptocurrencies by market cap since they are new or unknown projects. They have the potential to multiply by 100 but also the risk of disappearing overnight.

Mining (Bitcoin): using computers to validate transactions and earn rewards. Miners compete, consume electricity, and receive rewards in BTC.

Mutual Fund: a collective vehicle where multiple people contribute money that a professional manager invests in different financial assets: stocks, bonds, commodities, or a combination of them.

Net Asset Value (NAV): the price of each unit, which fluctuates according to the value of the mutual fund’s assets.

Offshore accounts: accounts opened in another country, used by some investors to access products not available locally or for tax advantages. It’s legal if declared, but each country has its own regulations.

Portfolio: the total set of financial assets (such as stocks, bonds, mutual funds, or real estate) owned by an investor or entity, aimed at achieving financial goals through diversification and risk management.

Put: a financial contract known as a derivative, whose value depends on a stock. It is the right to sell a stock at a certain price in the future.

REITs (Real Estate Investment Trusts): real estate funds that allow investing in large portfolios without directly buying property. They are traded through brokers like regular stocks, and there are even REIT ETFs.

Staking: some blockchains (Ethereum, Cardano, Solana) allow you to “stake” your coins on the network and earn interest. This generates passive income similar to a fixed-term deposit, but with more risk.

Unit share: when you contribute money to a mutual fund, you receive “units” representing your proportional participation in the portfolio.

Validation (Ethereum and other proof of stake): locking large amounts of coins to maintain the network and receive rewards.