How to invest in commodities

Commodity prices traditionally move in opposition to stocks, which means commodities investments may be more popular during bearish or volatile periods in the stock market. Investors often look to commodities to diversify a portfolio away from a reliance on traditional securities, or park cash during a volatile period. The most common example of this would be investors leaving bearish world stock markets to buy gold or silver as they are perceived as being a safe store of value, particularly in times of high inflation or currency devaluations.

Tradable commodity assets include; energy (oil, LNG, coal etc.), precious metals (gold, silver etc.), agricultural (barley, wheat, soybeans, coffee etc.), livestock and meat (feeder cattle, pork bellies etc).

Various exchanges around the world trade commodities including; The London Metal Exchange (LME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX), Chicago Mercantile Exchange (CME), Australian Stock Exchange (ASX).

Investors trade through licensed brokers dealing on these respective exchanges by buying and selling commodity futures contracts. Although many institutions and speculators invest using commodity futures, there are multiple options to get exposure to commodities.

Investors can obviously invest directly but only if it is practical to buy and store the chosen commodity- this might be workable for gold coins but clearly it is not for iron ore, uranium or lean hogs etc. Investors will instead choose to buy shares in Exchange Traded Funds (ETF) or buy shares in companies producing the preferred commodity.

ETFs typically buy the commodity and offer tradable securities to the public meaning investors can simply buy and sell shares in the ETF and over time, the performance of their (ETF) stock will track the performance of the particular commodity. For example, the SPDR Gold Trust (GLD) is an ETF trading on the NYSE and each of its shares represents 1/10th of the per ounce price of gold. (Note; each share is slightly eroded over time due to a small management fee).
An Australian example of a gold ETF is ETFS Physical Gold (ASX; GOLD).

Buying shares in listed companies with exposure to the chosen commodity is a common approach for retail investors. Investors can easily identify listed producers in different commodities e.g. beef, iron ore, oil etc. and then buy the preferred stock through their retail brokerage account.

Golden ASX 200

A record gold price last month of AUD $2067.66 is underpinning improved earnings and burgeoning market caps for Australia’s ASX listed producers & The Australian today reported that 6 of the 14 ASX 200 stocks reaching one year highs were gold stocks.

Northern Star Resources and Evolution Mining made records today, along with Newcrest, Regis Resources, Independence Group and Resolute Mining.

In today’s trade the gold price eased slightly to AUD$2025.97

Nickel surge a surprise

The nickel price has surged recently to a 12 month high and currently trades at AUD $20400 p/tonne. Luke Housego writing in the AFR (The Australian Financial Review) today reported that most traders were surprised and at a loss to explain the price upswing

A citi analyst commented “Nickel has rallied more than USD $2500 in in two weeks with little apparent change in fundamentals”. Other sources pointed to falling LME stockpiles as a possible explanation.

The 12 month chart shows Nickel has technical support around AUD $16800.

Old King Coal

Australia’s Coal exports have risen to $66.8 billion for calendar 2018 according to the latest DFAT figures enabling it to surge ahead of Iron Ore to become Australia’s most valuable export commodity.

Coal exports are comprised of approximately 55% thermal coal and 45% metallurgical coal. Domestically about two thirds of Australia’s electricity is still generated from coal.

Political and community debate about export of thermal coal and its effects on climate change may continue but so it seems will rising demand from existing importers including Japan, China, Taiwan, Korea and Thailand.

Top Commodities

Welcome to Top Commodities – an information website focussed on Australia’s key commodities in terms of relevance or importance to Australia’s economy.

Site includes live price updates for the ASX 200 and S&P 500 along with regular updates for all commodities. Commodity fact sheets are available for additional insight into each commodity’s contribution to the Australian economy and comparative importance globally.