Investing in commodities: explanation about investing in raw materials

Investing in commodities appeals to investors who value tangible assets and diversification beyond traditional financial markets. After all, commodities form the foundation of the global economy: without precious metals, energy, and industrial metals, virtually every production chain would grind to a halt.

In this article, we explain what investing in commodities entails, what options are available, and what you as an investor need to take into account.

What is meant by commodities?

Commodities are natural, unprocessed materials that are extracted directly from nature and serve as the basis for almost all economic activity. They form the building blocks of products, infrastructure, energy supply, and technology. Without commodities, there is no industry, no agriculture, and no modern society.

In the context of investing in commodities, this refers to materials that are traded globally and whose price is determined by supply and demand on international markets.

Characteristics of commodities as an investment

Commodities distinguish themselves from stocks and bonds through a number of specific properties:

• They have intrinsic value: a commodity is always physically usable.
• They are often scarce or finite, which can support value in the long term.
• They are not dependent on a single company or currency.
• The price is influenced by macroeconomic factors such as inflation, economic growth, and geopolitics.

It is precisely these characteristics that make commodities interesting as an investment for investors who want to diversify their wealth beyond traditional financial markets.

The main categories of commodities

Commodities are typically divided into four main groups:

Precious metals

Precious metals have played a role as a store of value and medium of exchange for centuries. They are not only used industrially but are also seen as monetary metals.

Examples:

• Gold: globally recognized as a safe haven.
• Silver: combination of investment and industrial use.
• Platinum and palladium: strongly linked to industrial applications.

Precious metals are unique because they can also be physically bought and stored, which distinguishes them from many other commodities.

Industrial metals

These metals are essential for production, infrastructure, and technology. Demand for these raw materials grows along with economic development and innovation.

Examples:

• Copper
• Nickel
• Aluminum
• Cobalt (important for batteries and energy transition)

Investing in industrial metals, such as investing in cobalt, is often more strongly dependent on economic cycles and technological trends.

Energy commodities

Energy commodities form the basis of the global energy supply and are sensitive to geopolitical developments.

Examples:

• Oil
• Natural gas
• Coal

These commodities are primarily traded via financial products and are less suitable for physical ownership by private investors.

Agricultural commodities

Agricultural commodities originate from farming and food production. Prices are influenced by harvests, climate, and seasonal effects.

Examples:

• Wheat
• Corn
• Coffee
• Cocoa

Although these commodities are important for the global economy, as an investment they are often volatile and primarily accessible via financial markets.

Commodities versus end products

An important distinction is that commodities are unprocessed. As soon as a material is processed into an end product, such as a car, electronics, or jewelry, it no longer falls under the category of commodities.

For investors, this distinction is relevant because only commodities themselves are traded on international commodity markets.

Why invest in commodities?

Investing in commodities is often used as a supplement to traditional investments such as stocks and bonds.

Commodities fulfill a different role within a portfolio: they represent real, physical value and are less dependent on the financial system. Precisely for this reason, they can contribute to stability and risk diversification.

1. Protection against inflation and loss of purchasing power

One of the main reasons to invest in commodities is protection against inflation. When the purchasing power of money decreases due to rising prices, commodities often retain their value better.

This is because commodities themselves are part of those price increases: energy, metals, and food form the basis of almost all consumer goods.

In particular, buying precious metals like gold has been seen for decades as protection against currency devaluation and monetary policy of central banks.

2. Diversification outside the financial system

Commodities often move differently than stocks and bonds. In times when financial markets are under pressure, commodities can actually offer stability.

This makes commodities interesting as an investment for investors who want to diversify their portfolio and be less dependent on a single market or sector.

Physical commodities, such as precious metals, also have no direct counterparty risk. You are not dependent on the solvency of a company or financial institution.

3. Scarcity and structural demand

Many commodities are scarce or even finite. At the same time, global demand continues to grow due to population growth, industrialization, and technological developments.

Think, for example, of industrial metals needed for electrification, or precious metals used both industrially and monetarily.

This combination of scarcity and persistent demand forms an important reason for many investors to investigate which commodities might be interesting to invest in for the long term.

4. Commodities offer tangible value

Unlike financial products, commodities represent physical ownership. This applies in particular to precious metals, which can actually be bought, stored, and sold again. For investors who value tangibility and transparency, this offers a sense of control and security.

Precisely for this reason, many private investors choose not only to track commodities on paper but also to actually buy commodities in physical form.

5. Protection in times of economic uncertainty

Historically, investors more often take refuge in commodities during periods of economic uncertainty, geopolitical tensions, or financial crises.

Commodities then function as a form of value storage when confidence in currencies or markets declines.

Although commodities offer no guarantee against price fluctuations, they are often used as a stabilizing factor within a long-term strategy.

Who is investing in commodities suitable for?

Investing in commodities is particularly suitable for investors who:

• want to diversify their portfolio
• value real, physical assets
• maintain a long investment horizon
• seek protection against inflation and systemic risk

Investing in commodities, such as gold, silver, cobalt, and coal, is becoming increasingly popular.

How to invest in commodities?

Anyone wanting to start investing in commodities will encounter different investment forms. The way you invest determines not only the risk but also the degree of control, transparency, and involvement.

Roughly, there are three main forms: physical investing, investing via financial products, and indirect investing via companies.

Physical investing in commodities

The most direct way of investing is actually buying commodities. This is particularly possible with precious metals such as gold, silver, platinum, and palladium.

With physical investing:

• you are the direct owner of the commodity
• you have no counterparty risk
• the value is transparently linked to the world market price

Physical ownership is often chosen by investors with a long horizon who use commodities as a store of value or protection against inflation.

With precious metals, one can choose coins or bars, with options for home storage or professional, insured storage.

Discover more about investing in gold bars and buying physical silver.

Investing via financial products

Another way to invest is via so-called paper commodities. Here, you follow the price development without physically owning the commodity.

Examples are:

• ETFs and ETCs
• futures and options
• commodity certificates

This form of investing is often used when trading commodities because it is suitable for shorter-term and active strategies.

The disadvantage is that you are dependent on financial institutions and market structures, meaning there is always counterparty and market risk.

Indirect investing via commodity companies

A third possibility is investing indirectly, for example via shares in mining companies, energy producers, or commodity processors.

The performance of these shares depends partly on the commodity price, but also on company-specific factors such as management, cost structure, and regulation.

This form differs from direct commodity investments and can therefore fluctuate more strongly than the commodity itself.

Which form suits you?

The choice of an investment form depends on your goal and profile:

• Do you want to preserve value and spread risks? Then physical investing often fits better.
• Do you want to actively capitalize on price movements? Then trading via financial products is more obvious.
• Do you want to profit indirectly from economic growth? Then commodity companies can be interesting.

For many private investors, simplicity and transparency outweigh complexity.

The risk of 'paper' commodities (ETFs and futures)

Many investors try to profit from commodities via ETFs (Trackers) or futures contracts. However, this entails specific risks that can erode your returns.

The Contango risk

Most commodity ETFs do not own the commodity themselves but trade in futures contracts. These contracts must be "rolled over" monthly. In a normal market, future contracts are more expensive than current contracts.

This price difference (contango) means that the ETF makes a small loss every month when rolling over. In the long term, this can lead to a significantly lower return than the actual price increase of the commodity.

Counterparty risk

With an ETF or a certificate, you are the owner of a financial product, not the metal. If the issuing institution or the custodian of the physical stock runs into trouble, you only have a claim on paper. As we have seen in previous crises, paper is patient, but not always safe.

In this article we explain why gold coins and bars are safer than gold stocks.

Which commodities to invest in?

The question of which commodities to invest in strongly depends on the goal you have with your investment.

Are you mainly looking for stability and store of value, or are you looking for growth and capitalizing on economic and technological developments? Different commodities fulfill different roles within a portfolio.

Precious metals: focus on store of value and security

Precious metals are the starting point for many investors when investing in commodities. They are globally recognized, relatively liquid, and have a long history as a store of value.

• Gold is often seen as a safe haven and protection against inflation and monetary uncertainty.
• Silver combines store of value with industrial applications, giving it both defensive and cyclical properties.
• Platinum and palladium are more dependent on industrial demand but offer diversification within precious metals.

For private investors seeking clarity, precious metals often form the core of commodities as an investment.

Industrial metals: capitalizing on economic growth

Industrial metals are closely linked to economic activity and technological innovation. They are used in infrastructure, production, and the energy transition.

Examples are:

• copper (electrification and infrastructure)
• nickel (batteries and steel production)
• cobalt (essential for lithium-ion batteries)

Investing in cobalt and comparable metals can be interesting given growing demand but typically carries higher volatility and cyclical risks.

Energy commodities: sensitive to geopolitics

Oil, gas, and other energy commodities play a crucial role in the global economy. Their prices react strongly to geopolitical tensions, production agreements, and economic developments.

For private investors, energy commodities are primarily accessible via financial products and less suitable for physical ownership. They are therefore often used by active investors focused on trading commodities.

You can invest in various commodities. The Silver Mountain focuses on precious metals such as gold, silver, and platinum.

Buying commodities versus trading

Anyone delving into investing in commodities soon arrives at two fundamentally different approaches: buying commodities or active trading.

Although these concepts are sometimes used interchangeably, they differ strongly in goal, risk, and approach.

Buying commodities: aimed at store of value

Buying commodities involves actually purchasing and holding a commodity, usually with a long term in mind.

This strategy is especially popular with investors who see commodities as protection against inflation, currency risk, and economic uncertainty.

Characteristics of buying commodities:

• focus on the long term
• aimed at store of value and stability
• limited transaction frequency
• often in physical form, such as precious metals

Physical gold and silver, in particular, are chosen by private investors due to their tangibility, global tradability, and relatively clear risk profile.

Trading commodities: capitalizing on price movements

Trading commodities is aimed at exploiting short- to medium-term price movements. Physical ownership is rarely pursued here; the investor speculates on rising or falling prices via financial products.

Characteristics of trading:

• focus on the short term
• actively following markets and news
• use of financial instruments such as futures, ETFs, and options
• higher volatility and risk

Trading requires knowledge, experience, and discipline. Price movements are influenced by geopolitics, macroeconomic figures, and market expectations, causing results to fluctuate strongly.

What are the risks of investing in commodities?

Investing in commodities entails specific risks that require careful consideration. The commodities market is sensitive to geopolitical influences, natural disasters, and changing economic conditions. Prices can fluctuate sharply, presenting both opportunities and risks.

Beyond market risks, regulations also influence commodity trading. Environmental legislation and energy policy impact oil and gas, while agricultural products are subject to seasonal factors and trade restrictions.

Furthermore, some commodities have limited liquidity, making them not always easy to trade. Consider silver, where industrial demand is rising and available supply is limited.

Conclusion: precious metals as a commodity investment

Investing in commodities offers investors the opportunity to diversify their portfolios with tangible, real value. Commodities can offer protection against inflation, economic uncertainty, and fluctuations in financial markets. In this regard, the distinction between buying commodities and active trading is very important.

For many private investors, precious metals such as gold and silver form a clear and stable basis within commodity investing, thanks to their global tradability and the possibility of physical ownership.