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

Investing via financial products gives you exposure to commodity prices without having to store the commodity yourself. However, how they work and their associated risks vary significantly per product.

Examples include:

• exchange-traded products such as ETFs, ETCs, and other ETPs;
• futures and options;
• commodity certificates;
• funds that invest in a commodity index or commodity producers.

Some exchange-traded products physically hold the underlying commodity, while others use futures, swaps, or an index structure. Therefore, the product name alone does not tell you enough about what you actually own. Always check the legal structure, backing, costs, and risks in the prospectus and the Key Information Document (KID).

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.

What are the risks of ETFs, ETCs, and futures?

ETFs, ETCs, and futures can provide exposure to commodity prices, but vary greatly in terms of ownership, backing, costs, and risk. It is therefore important not to treat all exchange-traded commodity products under the generic label of 'paper commodities'.

What is the difference between an ETF, ETC, and ETP?

An ETP is an umbrella term for investment products traded on an exchange. This includes ETFs, ETCs, and ETNs, among others. These acronyms appear similar, but their legal structure can differ fundamentally.

• ETF: an Exchange Traded Fund is an exchange-listed fund. A commodity ETF can, for example, track an index of commodity companies or gain exposure to multiple commodities via derivatives.
• ETC: an Exchange Traded Commodity is an exchange-traded product that tracks the price of a single commodity or a basket of commodities. It can be physically backed, but it can also use derivatives or a debt structure.
• ETN: an Exchange Traded Note is typically a debt instrument issued by a financial institution. Its value tracks an agreed index or commodity price, but the investor also incurs credit risk on the issuing institution.

The product name alone does not automatically clarify how exposure is achieved. Always review the prospectus and the Key Information Document before evaluating a product.

Physically backed, via futures, or synthetic

A commodity product can track the price of the underlying market in several ways. The chosen method determines which additional risks and costs arise.

Even with a physically backed exchange product, retail investors typically own a financial instrument rather than a specifically designated coin or gold bar that can be freely retrieved. Exact rights vary per product.

Want to learn more specifically about the operation and backing of gold trackers? Read our article on gold ETFs.

What are contango and backwardation?

Contango and backwardation describe the relationship between futures prices for different delivery months. This term structure can positively or negatively affect the return of a futures product.

A futures contract has an agreed expiration or delivery date. A fund seeking continuous exposure closes an expiring contract and opens a position in a contract with a later expiration date. This is called rolling over. How often and when this occurs depends on the product's strategy.

• Contango: a contract with a later delivery date is more expensive than the expiring contract. Rolling over can then result in a negative roll yield.
• Backwardation: a contract with a later delivery date is cheaper than the expiring contract. The roll yield can then be positive.

Contango does not mean that every commodity fund automatically incurs a fixed loss every month. The ultimate return also depends on futures price movements, the contract months selected, collateral, management fees, and the roll strategy. A futures product can therefore perform differently than the current spot price of the commodity.

Counterparty and product structure risk

Counterparty risk varies per commodity product and is not identical for every ETF or ETC. A synthetic product operating with swaps, for instance, has different dependencies than a product holding physical gold bars.

Pay attention to, among other things:

• which legal entity issues the product;
• whether the commodity is physically held;
• who acts as custodian;
• what collateral backs derivatives or debt obligations;
• what happens if a counterparty or issuing institution experiences financial distress;
• whether retail investors are entitled to physical delivery;
• which investor protection rules apply to the product.

With a debt instrument, the creditworthiness of the issuing institution can be a major risk factor. With a physically backed product, the custody structure, costs, and legal claim are paramount. Specific risks are detailed in the prospectus and the Key Information Document (KID).

Tracking difference and ongoing charges

An exchange-traded product almost never tracks commodity prices entirely without deviation. The difference between the return of the product and the tracked commodity or index is called the tracking difference.

This divergence can result from:

• annual management fees;
• custody and insurance costs;
• transaction costs when rolling futures;
• yield or costs from collateral held;
• currency movements;
• liquidity and bid-ask spreads;
• the chosen index and rolling methodology.

Therefore, a low annual fee does not automatically mean the product closely tracks the spot price. In addition to stated costs, compare the historical tracking difference and the replication method used.

Exchange-traded products vs. physical precious metals

An exchange-traded commodity product may suit investors who value rapid tradability and do not want to arrange physical storage. Conversely, the investor remains dependent on the product structure, exchange, broker, manager, and any custodians or counterparties.

With physical precious metal, you own coins or bars directly. This form involves no fund management or roll effect, but carries other costs and risks, such as the premium above spot price, the sell-side spread, insured delivery, and secure storage.

Which option is appropriate depends on your objectives. For short-term trading and quick execution, an exchange product can offer practical advantages. Those seeking tangible ownership and a long-term store of value may consider physical precious metals.

Read also our comparison of physical gold vs. gold mining stocks. For more details on premiums, spreads, and storage, see our article on the costs of investing in precious metals.

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

How does commodity trading work?

Commodity trading brings together producers, buyers, traders, and investors across physical markets and financial futures markets. They buy and sell precious metals, industrial metals, energy products, and agricultural commodities, each with a different objective.

For example, a mining company seeks certainty regarding the future selling price of copper, while a manufacturer aims to limit the risk of rising copper prices. Investors and active traders take positions to gain exposure to anticipated price movements.

Commodity trading occurs on spot markets, regulated futures exchanges, and in private over-the-counter (OTC) markets.

What is the commodity spot market?

On the spot market, commodities are bought and sold at the current market price, with delivery taking place immediately or within a standard short settlement window. This price is referred to as the spot price.

The spot market plays a vital role in the physical economy. Mining companies deliver metals to refineries, oil producers sell to refining and energy companies, and agricultural producers deliver their harvests to traders and food processors.

Prices for physical precious metals are also tied to an international spot price. However, a retail buyer of a coin or bar pays more than just the intrinsic metal value. Production, distribution, and insurance costs are added on top of the spot price. This price difference is known as the premium.

What is a commodity futures contract?

A commodity future is a standardized contract to buy or sell a specified quantity of a commodity at an agreed-upon price on a future date. The exchange defines parameters such as quantity, quality, delivery conditions, and expiration date.

This standardization enables many market participants to trade the exact same contract. A clearinghouse sits between buyer and seller to handle financial settlement. While this mitigates certain counterparty risks, it does not eliminate the price volatility or leverage risks inherent to the contract.

Futures can be physically or financially settled. With physical settlement, delivery of the underlying commodity takes place according to exchange specifications. With financial settlement, price differences are settled in cash.

Retail and financial investors typically close or roll over a futures position before the delivery date. They are primarily interested in price movements rather than taking physical delivery of oil, copper, or wheat.

Why do companies use futures?

Producers and buyers use futures primarily to mitigate the risk of adverse price movements. This practice is known as hedging.

A producer can sell a futures contract to secure greater certainty about the price they will receive for their commodity later. Conversely, an industrial buyer can purchase a futures contract to partially hedge against higher future procurement costs.

Gains or losses on the futures position can thus offset opposing price movements in the physical market. However, a hedge is rarely perfect, as contract prices and actual physical market prices can diverge.

Which parties trade commodities?

The commodity market consists of parties with an underlying economic need for the physical commodity and parties seeking purely financial exposure.

Speculators generally do not hold an underlying physical position to hedge; instead, they knowingly assume price risk in anticipation of profits. While their trading activity enhances market liquidity, speculation via futures or options carries substantial loss potential.

Where are commodities traded?

Commodities are traded globally on specialized exchanges and OTC markets. The relevant venue depends on the specific commodity and contract structure used.

Prominent commodity exchanges include:

• CME Group and COMEX: agricultural commodities, energy, and precious metals;
• Intercontinental Exchange (ICE): energy, agricultural commodities, and precious metals;
• London Metal Exchange (LME): primarily industrial metals such as copper, aluminum, nickel, and zinc.

These exchanges serve multiple functions: they connect buyers and sellers, standardize contracts, and establish benchmark prices used across physical trade contracts. Not all commodity transactions occur on exchanges; large producers, trading houses, and industrial buyers frequently negotiate terms directly in the OTC market.

What is the difference between buying and trading commodities?

Buying commodities typically aims for long-term ownership or value storage, whereas trading centers on taking advantage of or hedging short-term price movements. Your underlying objective dictates which format and associated risks are relevant.

Buying physical gold or silver gives you tangible ownership without needing to roll over futures contracts. In return, you pay premiums, spreads, and potential storage costs.

With financial products, you usually do not acquire direct ownership of a specific physical commodity. The exact mechanics depend on the product structure: some products are physically backed, while others utilize futures, swaps, or shares in commodity companies.

What are the risks of active commodity trading?

Active commodity trading involves elevated risk because prices can react rapidly to production disruptions, inventory figures, weather conditions, geopolitical events, and macroeconomic forecasts. In futures and options trading, leverage can magnify gains as well as losses.

A futures position typically requires maintaining margin. Adverse price swings can trigger margin calls requiring additional collateral. If an investor cannot meet a margin call, the position may be forcibly liquidated at a substantial loss.

Maturity dates also demand close monitoring. Futures contracts expire on predetermined dates. Investors wishing to maintain exposure must close, settle, or roll over positions into later contracts. As a result, total performance may diverge from the prevailing spot price of the commodity.

Commodity trading therefore demands thorough understanding of contract terms, product structures, leverage mechanics, and settlement requirements. It represents a fundamentally different approach than holding physical precious metals long-term as part of a diversified portfolio.

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.