What's happening?What actually is a commodity? You would think that this question should have a simple answer, but as ever in the investment world, no
What actually is a commodity? You would think that this question should have a simple answer, but as ever in the investment world, nothing is that straightforward.
A commodity is almost anything that is tradeable. But as far as markets are concerned, it normally refers to the basic items of life, from ‘soft’ commodities such as food and drink through to metal ores and gold.
Essentially, if it is not nailed down, it is probably a tradeable commodity – and that probably includes the nail.
Digging deep: Rio Tinto is a well-diversified FTSE100 mining giant, and a leading producer of the three most-consumed industrial metals
The price of commodities will affect the value of our economy and all the companies involved in it. So a booming economy is likely to see some enthusiastic commodity prices, and of course the opposite is also true. However, as the nature of economies change so do the uses, demand for and value of these commodities.
Why Does It Matter?
The price of commodities affects everything! So even if you have no investments at all, you are still exposed to commodity prices through food or petrol.
A good example is the price of oil. The standard line used to be that we will always need oil – but really? Perhaps not, certainly not as much. After all, just look at the rapid change to our cars. Whether you like them or not, electric vehicles are here to stay.
For proof of fears over the price of oil, just look at Saudi Arabia selling off a chunk of its national oil industry, Aramco. They are doing that because they are worried that within the next century the value of their liquid gold will have evaporated into their sea of sand.
What Should I Do?
If we think that, despite all the bad news, the global economy will soon be improving after last year’s horror show, then we should be buying commodities. But which commodities? Soft ones (such as food) or hard ones (such as metals)?
With the demand for ESG (Environmental, Social and Governance) investing, green factors are a consideration. The move from oil and gas to more environmentally-friendly power is inevitable. So let’s look at those commodities that will benefit here.
In terms of metals that will do well from the development of electrical power and battery demand, the likes of platinum, silver, copper and nickel will all be needed.
Perversely, such confidence will have the opposite effect for one favourite metal: gold. The gold-bugs thrive when fear stalks the market, as we saw last year, but as those nerves abate so will demand for gold.
If you want to invest directly in a company, look at Rio Tinto. This is a well-diversified FTSE100 mining giant, and a leading producer of the three most-consumed industrial metals: iron ore, aluminium and copper. But it also produces the more specialist commodities including boron, salt, diamonds and titanium.
For a lower risk approach, the iShares MSCI Global Metals and Mining Producers ETF passive fund fits my spec for this type of investment.
Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.