Invest in commodities

Trading (short term)

A popular form of commodity investing, trading involves buying and selling commodities quickly in order to profit from price fluctuations. This approach is best suited to people who want to generate money in the short term; here’s a quick run-through of the key things to consider when trading.

• Learn the basics of technical analysis. Technical analysis is the term for reading price charts and spotting trends. Successful traders can use past data to predict future movements in commodity prices and make trades accordingly.
• Understand the different ways commodities can be traded. There are multiple different forms of commodities trading. You can buy and sell physical commodities, trade them with CFDs, use futures contracts to speculate on future value, and a variety of other methods. These are all explained in more detail below, and it’s important to have knowledge of your options before placing your first trade.
• React quickly to events. Commodity markets are notoriously volatile and can move shapely in reaction to major events – for instance the drop in energy usage during the coronavirus pandemic briefly sent the price of US oil below $0 in April 2020. You want to keep up-to-date with the latest commodities news so you can stay ahead of the market.
• Focus on mitigating risk. When trading any asset, the goal is to make sure that you win more often than you lose, and also that your profits when you’re right exceed your losses when you’re wrong. You want to turn £200 into £220 if the market moves in your favour, but only see your £200 fall to £195 if it doesn’t. Managing your risk helps you stay in the game and avoids being too exposed to any one trade.
• Keep calm and focused. Markets are always moving up and down, and it’s easy to be drawn in and make stupid mistakes. This is the central thing to avoid when trading, and you must always be sure to keep a clear head. Just because you’ve made a few successful trades in a row does not mean the next one will follow suit, so don’t start taking on unnecessary risk.
• Look for the right trading platform. Your choice of broker will determine everything from the types of commodities you can trade, whether you can use techniques such as spread betting, and what fees you’ll be charged when making trades. Checking out our in-depth broker reviews is the best way to find the right trading platform.

The most important thing is not to start trading without a plan. Taking some time to create a strategy you can stick to is the best way to improve your chances of turning a profit when trading commodities. 

Additionally, take each trade in isolation. You might buy £200 worth of coffee futures and sell them a few hours later for £210 at a profit of 5%. That is a successful trade, regardless of whether the price of those futures then rises so you could have sold them for £220 later in the day. Any trade on which you make money is a good trade.

Investing (long term)

The alternative is to buy and hold assets for the long term. Many people choose to own physical gold in the form of bars because it tends to keep a stable price even when other assets are tumbling (gold is commonly considered the world’s reserve store of value). You can take this approach with a variety of assets, and here are the main things to think about if you’re considering it.

• Conduct fundamental analysis. Rather than honing your ability to read a price chart, it’s more important to consider the long term trends that might impact a commodity’s value. For instance, is the growing demand for renewable energy going to reduce the price of oil, and will lithium rise in price as battery technology advances?
• Look for long term value. Unlike with trading, you’re more concerned with what a commodity will be worth next year than you are with what its price might be tomorrow. Your aim is to hold the commodity as the market fluctuates and sell it at a later date after its prices has (ideally) trended upwards.
• Think about how long you want to invest for. You cannot invest your money in two things at once, so you want to consider how long you’re happy for your cash to be tied up in a certain commodity. Figure out how long you can live without the sum you’re investing, and how soon you’d like to see returns on your investment.
• Prepare for volatility. One thing that is always true is that markets fluctuate, and this is particularly true of commodity markets. For instance, in 2014-15 a combination of factors led to global commodity prices falling by as much as 38% before rebounding strongly in 2016. While such huge dops are rare, they’re more common to commodities markets than say the stock market. 
• Be ready to change your approach. While you want to hold your nerve through volatility, you need to act rationally and move your money if market conditions change fundamentally. If the price of wheat is falling due to concerns about future harvests rather than just regular trading fluctuations, you will want to react and invest in wheat before the price falls further.
• Choose a reliable broker. As you’re going to be trusting a platform with your money and assets for a long period of time, or buying valuable commodities such as gold directly, you want to ensure it is reliable and regulated. There are a wide variety of commodities brokers to choose from, and it’s good to compare your options before using a service.

The most important part of long term commodities investing is the research. To spot value, you need to consider which materials and resources will become increasingly integral to society as time moves forward.

Gold has traditionally been a useful investment as a store of value, so it might be a good idea to include some exposure to gold in your commodity portfolio. On top of this, however, you will want to think about any metals which might be a key part of emerging technology, or chemicals that have the potential to improve farming yields.

What is best for me?

The answer to this question depends on your own unique circumstances and investment goals. Here’s a checklist to go through to help you determine the best approach for you.

• Know the differences between types of commodities. When investing in anything, it’s always essential to understand the market and the different assets available. There are over 100 commodities you can trade, ranging from farmed goods such as wheat and corn to metals like gold and silver.
• Figure how much you want to invest. The amount of money you have to invest can help determine your approach to the commodities markets. If you have a larger budget (in the £1,000s), you might want to invest in precious metals for the long term, whereas if you only have £200 or so to play with then you might want to consider placing trades on lower-priced commodities and building your investment incrementally.
• Decide the level of risk you’re comfortable with. Each commodity carries a different level of risk. The price of gold is notoriously stable, and as such it is usually regarded as a ‘safe haven’ investment. On the other hand, commodities which are used to produce goods – such as cotton or coffee – tend to see more price volatility. When you’re trading, you’ll be more exposed to short term volatility and it is therefore a riskier way to invest than buying commodities for the long term.
• Consider your timeframe. Generally speaking, if your focus is on the short term and generating regular profits as a source of income, then you want to start trading. Alternatively, if you’re building wealth for the future, for instance as part of a plan to save for a house or for retirement, then long term investing might be a better approach.
• Select your ideal platform. Once you have decided how you want to invest your money, use our reviews to choose the platform best suited for your needs. You might want a trading platform that offers a variety of CFDs, futures, and ETFs, or you may prioritise a platform that allows you to get bars of gold at a reasonable price and stores them securely for you. 
• Start investing gradually. Whether pursuing long or short term profits, you should always start out with small investments. Say you have £600 you want to use to trade commodities, rather than investing it all at once, start by placing trades with £200. This will allow you to learn the ropes and protect you from big losses, and you can then add to your trade sizes gradually and grow your money over time.

There’s one final thing to bear in mind when considering whether you want to trade or invest your money: you don’t necessarily have to choose one or the other. It’s quite common for people to do a bit of both when building their portfolios. 

For instance you might want to invest a few hundred pounds in silver for the long term, and also open a broker account to make other trades.

What to invest in, and ways to invest

There are plenty of options, from buying physical assets such as gold and silver bars and coins, to making trades with online brokers. Before making your first investment, it’s a good idea to understand all the approaches available. 

To help you figure out which way you want to go, the following sections take you through the different types of commodities you can buy and trade, and the methods by which you can do so. 

What should I invest in?

Commodities are broken up into two different categories: soft commodities and hard commodities. The difference between the two is the ways in which they are obtained, with soft commodities being farmed or grown, and hard commodities being extracted or mined.

Soft commodities are all agricultural, including live animals, whereas hard commodities are further broken down into metals and energy. Keep reading for a quick summary of each commodity type so you understand your options.

Agricultural commodities

Food, other crops, and livestock are soft agricultural commodities. Global food supplies are pivotal to the functioning of societies around the world, and commodities such as wheat are among the most traded assets each year. Major agricultural commodity markets include:

• Coffee
• Cocoa
• Sugar
• Corn
• Wheat
• Soybeans
• Beef
• Pork

Metal commodities

One of two kinds of hard commodities, many people choose to own bars or coins of precious metals and hold them as a store of value, or trade them for short term profits. Different metals are increasingly important for their use in technology, with the price of lithium having risen throughout the 21st century due to its use in batteries. Here are some of the most prominently traded metals:

• Gold
• Silver
• Platinum
• Palladium
• Copper
• Lithium
• Aluminium
• Cobalt
• Nickel

Energy commodities

The other form of hard commodities is those extracted and used for energy production. This category includes the most commonly traded commodity in the world: oil, which is traded as different commodities depending on where it is extracted (e.g. Brent Crude and West Texas Intermediate). Here’s a list of the most commonly-traded energy commodities:

• Oil
• Coal
• Natural gas
• Ethanol
• Propane 
• Uranium

Ways to invest

You need to know two things: the three types of commodity trades and the different methods you can use to invest. 

First, here’s a quick summary of the three types of contracts for making commodities investments and what they mean.

1. Spot commodities. Think of these as ‘on the spot’ transactions: trades to buy a specific commodity right now at its current market rate and take delivery of it. If you’re buying physical metals, then you’re making a spot trade.
2. Forward options. These agreements give you the option to make a trade in the future. Imagine platinum is currently trading at £25 a gram and you believe in two weeks’ time it will have risen to £27. You could take out a forward option which would allow you to buy a gram of platinum at £26 before that date. The important thing is that you aren’t obligated to make the trade, so if the price doesn’t rise you can just choose not to execute it, but if it does you can buy it at a cheaper price.
3. Futures contracts. Futures are like forward options except you do have to complete the trade. Looking at the same example, you could agree the exact same terms and in two weeks’ time you would be obligated to buy the agreed amount of platinum at £26 a gram, even if the price had ended up falling to £24.

With both forward options and futures contracts you have to pay premiums (fees) for the duration of the contracts – so factor these into your price decisions if trading this way.

Now we’ve covered the three different types of commodities trades, here are the alternative ways to invest.

• Buying commodities directly. Particularly common with precious metals such as gold, commodities can be bought directly and stored safely for the long term. For instance, you can buy several gold bars at the current market rate and arrange to have them stored securely by the service through which you have bought them.
• CFD trading platforms. Using broker apps, you can invest £100 in an asset such as gold, and sell that trade after the price has moved (e.g. if it goes up by 10% you can sell your position for £110). This is known as CFD trading, and it’s what most retail investors use to day-trade. One crucial thing to be aware of is that when trading CFDs you don’t own the underlying asset – with the previous example you’re betting on the price of gold, rather than buying it in the form of bars or coins.
• ETFs. An ETF (or Exchange-Traded Fund) can contain a group of commodities at the same time and be traded on exchanges just like stocks. For example, an ETF could contain gold, silver, and platinum – enabling you to invest in a variety of precious metals at the same time.
• Commodity-producing stocks. Another approach is to get shares in the companies that produce commodities. Hard commodities are complicated to extract, and therefore require mining or drilling companies to supply the market. These companies are usually publicly traded, and their fortunes closely map those of the commodities they produce.
• ISAs. If you want to save for your future, then you could open a commodity fund ISA. ISAs are Individual Savings Accounts, and they allow you to deposit up to £20,000 a year to make investments that are sheltered from tax. You can set up an ISA to give you exposure to various commodity markets.
• Robo-advisors. These are services that use technology to help you build an investment portfolio. You can download one of their apps, choose the option to invest in commodities, and then the robot will take the budget you set and put it into a range of commodities ETFs to grow your money over time.
• Mutual funds. Mutual funds are financial vehicles made up of a pool of money managed by a singular fund manager. Investors into the fund entrust their money to the fund manager, who then makes investments to generate returns for all the investors. You can find mutual funds with a specific focus on commodities investing and put your money into the commodity markets this way.
• Trusts. Trusts are companies that try to generate returns by investing large sums of money. To use trusts to bolder your commodities investments, you need to get shares in a trust which focuses on buying, selling, and trading commodities.

What now?

Now you’ve finished this beginner-friendly guide to commodity investing, the best thing to do is follow some of the links at the top of this page to learn more and make your first investment. Alternatively, you can take one of our commodity courses or keep scrolling down to find the latest commodity news and price data.