o3 BLOG | Investing

What is Commodity Investing and Where do I start?

May 2, 2022

O3 Mining

Commodity Investing — Savvy investors know that a crucial part of building a winning portfolio is to diversify their assets. To reach your investment goals, you can maximize your returns with gold stocks and commodities. Like gold and other precious metals, commodities can offer an opportunity for investors to trade and profit from changes in gold prices. Commodity prices tend to rise with inflation, making commodities one of the few assets that benefit from inflationary periods. 

 

However, commodities help diversify portfolios, offering investors a hedge against falling markets resulting in positive returns. There are also many different commodity investment vehicles to choose from, including stocks, bonds, mutual funds, futures, and fiat currencies. As supply, demand, and geopolitics all affect commodity prices, it’s essential to know how to invest in the most traded commodities, including gold. 

 

What is Commodity Investing?

Commodity trading isn’t new and dates back centuries. It has played an important role for economies and people from all cultures and backgrounds. From precious metals like silver and gold to fuel like oil and gas, day exchanges took place where assets were traded and used as an investment vehicle for people of all classes and regions. Commodity investing can involve the physical commodity or the business itself, and day traders used entities to drive the economy in the local areas across the globe. Investors purchase shares in commodity companies, mutual funds, or exchange-traded funds (ETFs). 

 

Why Gold is a Trusted Commodity 

Because demand for commodities tends to run high in periods of high inflation and political turmoil, gold is a safe investment against a falling U.S. dollar. While there is increased volatility, that doesn’t necessarily translate into increased risk. Gold stocks have historically held up exceptionally well against stock market speculation. An increase in gold demand tends to raise the price, making it attractive to investors in several ways. 

 

Ways to Invest in Gold Commodities

Commodities like precious metals have proven to be a haven for investment because it boasts potential for diversity and growth. Whether used in jewellery, technology, investment products, or bank reserves, a shrinking dollar will always raise gold prices. Here are some ways to invest in commodities if you’re looking to diversify your portfolio: 

 

ETFs and Mutual Funds 

ETFs, along with mutual fund options, include gold stocks that apply to producers but also exploration and mining companies. If you have an online stock trading account, you can trade the price movements in gold through the fund. The trust holds the gold in reserve, and its value changes based on the price of gold. The price of the SPDR Gold Trust is roughly 1/10 of the cost of gold. In other words, if gold futures are trading at $1,700, the Gold Trust will trade at roughly $170. The minimum price movement is $0.01, meaning you gain or lose $0.01 for each share you own each time the price moves one cent. Consider your position size, leverage, and ETF price before settling on fair play. 

 

Gold Futures Markets 

Day trading gold based on its short-term price movements, where transactions occur electronically, and are processed solely through your trading account — this is one of the most popular ways to trade gold. Day traders close out all contracts (trades) by the day and calculate profit based on the difference between the price of purchasing the contract and the price they sold. On the futures exchange, gold moves in $0.10 increments only. What’s more, the amount you need in your account to day-trade a gold futures contract will depend on your futures broker.

 

Managed Gold Futures Fund

A managed futures fund or commodity pool is like a mutual fund. Several investors contribute to the collection, with the pool buying and selling the futures contracts on various commodities. When looking for a legitimate commodity pool, ensure you vet the group you’re considering. 

 

Physical Gold Bullion

Going through your bank or finding a reputable dealer is best when considering the purchase of physical gold. Whether it’s bullion or jewellery, it’s critical to assess the quality, mint, and weight of the gold or silver you will be buying. Moreover, making sure it’s safe and secure should also be top of mind for any investor considering the option. After all, things can happen like theft or robberies, so consider insurance for potential robberies and break-ins. Getting an independent valuation should also be a priority. 

 

Pros and Cons to Invest in Commodities 

Adding commodities to your investment strategy allows you to carry less risk in your portfolio and take advantage of the rise in prices. Due diligence is imperative before commodity investing, as it can affect long-term positions on quality gold stocks. A diversified portfolio that includes a reasonable commodity allocation is probably the best path for those who want exposure to this asset class.

 

The Bottom Line

Determining the best approach given your current financial situation, goals, and comfort level with commodity investing is key. Consider what works appropriately and remember to diversify and not to over-allocate.  


Sources:

https://www.investopedia.com/investing/commodities-trading-overview/

https://www.schwab.com/futures/gold

https://www.investopedia.com/articles/exchangetradedfunds/08/gold-etf-gold-futures-showdown.asp

https://o3mining.com/articles/gold-reserves-by-country/

https://o3mining.com/articles/what-is-gold-bullion/

To learn how O3 Mining can add long-term value to your portfolio, contact us today.

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    What a year it has been! I want to personally thank you for supporting O3 Mining throughout this unprecedented time. At O3 Mining we experienced a year of tremendous growth as our exploration campaigns surpassed all expectations and we invested significant capital into our projects.

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