How to invest in commodities

How to invest in commodities

Investors seeking the perfect stock market hedge just might find it by investing in commodities.

Commodities are the raw materials that are either consumed or used to build other products. From orange juice, to timber, oil and gas or gold, commodities take many forms.

The beauty of diversifying with commodities is that when one asset goes down, investors own others that will offset the loss and rise in price. The lower the correlation between assets, the greater the diversification benefit. Investing in less correlated assets keeps an investment portfolio from extreme volatility. For instance, it’s much easier to digest a 10% loss than it is a 30% decline.

Another reason to consider investing in the commodity market is its low correlation with stock market returns.

“While many see commodity investing as intimidating and risky, investing in commodities is actually a great hedge when the stock market is falling. Historically, investments in crops, metals, energy, currencies and other tangibles are negatively correlated with both stocks and bonds – when the market goes down, the value of commodity investments go up,” said Manav Garg, CEO and founder of Eka Software, a digital commodity management platform.

Another reason to invest in commodities is it offers the ability to shield against inflation. As prices rise, and goods become more expensive, commodity prices also increase. With commodities at the epicenter of the global supply chain, an investment in commodities can act as an effective inflation hedge, says Karen Harding, a chartered financial analyst and partner at NEPC in Portland, Oregon.

In sum, investing in commodities can offset the loss in purchasing power that arises from inflation and minimize investment volatility.

What Are the Risks of Investing in Commodities?

Commodities do have risks, distinct from the perils of investing in the stock and bond markets. Many variables impact commodities pricing.

“Commodity prices are among the most volatile of any market due to their sensitivity to country, economic, and operational risks such as strikes, unexpected harsh weather, terrorist attacks, and natural disasters,” Valladares says.

Landry believes that the best time to own commodities is when inflation is high or when there is a scarcity of a commodity or excess demand. When those conditions aren’t in play, returns may suffer.

Since many commodities are international in nature, investment returns are also impacted by changes in the exchange rates between foreign currencies and the U.S. dollar.

Commodities prices are extremely volatile. Within a short time, prices can peak and trough dramatically.

Should You Be Investing in Commodities?

This type of investing is risky with tremendous volatility. The lack of correlation between commodities and typical stock and bond investments can be helpful at certain times, while during other periods commodity returns can drag down an investor’s total returns.

Commodities investing is cyclical and distinct commodities offer varying returns. Over the past 10 years, the S&P GSCI commodity index price peaked in 2011 near 5,700, bottomed in 2016 at 2,000 and is currently trading slightly above 2,600. While individual commodities follow their own ups and downs in price.”

Investing in commodities is a good way to diversify your portfolio. However, commodities aren't a homogenous asset class. They can be divided into energy, metals, and agri commodities. Most commodities have been red hot amid the strengthening global economy. How can you invest in commodities and benefit from the uptrend in commodity prices?

Commodities are real assets and you can own and store them. The trading in commodity markets globally is higher than what we see in stock markets. Along with investors, commodity buyers and sellers also participate in commodity markets to hedge their positions.

How to invest in commodities

There are six main ways to invest in commodities, including:

  • Buying the commodity physically
  • Trade in the futures market
  • Trade in derivatives like CFD (Contract for Differentials) and binary options
  • Buy ETFs that invest in commodities
  • Buy stocks of commodity producers
  • Invest in ETFs that invest in stocks of commodity producers

Buying commodities physically might not be the best strategy. Realistically speaking, you can also do so with only high-value commodities like precious metals. It isn't possible for investors to buy and store commodities like copper and crude oil since they would require a lot of storage space.

Trading in commodity futures is a good way to get leveraged exposure to commodities. You can also invest in ETFs that invest in commodity futures. Another way of investing in commodities is to invest in stocks of companies that produce them. The stock prices of commodity producers have a high correlation to the underlying commodity. 

Copper futures versus S&P 500

Finally, you can invest in ETFs that invest in a basket of commodity stocks. Through these ETFs, you can also get diversification and get access to many commodity stocks. If you are comfortable taking higher risks, you can also trade in commodities through derivative instruments like binary options and CFDs. However, these are generally short-term trades and are speculative in nature.

Is it hard to trade commodities?

It isn't hard to trade commodities, but you need to get accustomed to the nuances of futures markets. While trading in futures, you might face frequent margin calls and your losses might exceed the initial investment that you made. If you aren't comfortable with margin calls and are just looking at exposure to a commodity, an ETF that invests in commodities would fit the bill.

As commodity prices rise, this alternative asset class to traditional stocks and bonds is capturing the attention of investors.

Commodities are the raw materials that are either consumed or used to build other products. From orange juice to cotton, oil and gas to gold, commodities take many forms.

As the U.S. economy rebounds from pandemic-induced lockdowns and spending rises across the board, commodity demand is increasing. That's a big shift from last year when commodity prices fell, and oil prices were negative, says William De Vijlder, group chief economist of BNP Paribas.

Some commodities, such as gold, may be reflecting increased inflation concerns with the economy flush with fiscal and monetary stimulus. Other commodities, such as copper, De Vijlder says, are seeing a structural demand shift since the metal is used in products like electric vehicles and other infrastructure built to combat climate change.

If you're interested in investing in this space, here are a few common questions that will likely come up:

— How do you invest in commodities?

— What should investors know about commodity trading?

— Why is it risky to invest in a commodity?

— Is investing in this type of asset right for you?

— How do you allocate commodities in a portfolio?

How to Invest in Commodities

There are several ways to invest in commodities, says Will Rhind, CEO of GraniteShares, an exchange-traded fund issuer. Investors should consider the following options.

Buy stocks and bonds of commodities producers. A practical way to invest in commodities is to buy the stocks and corporate bonds of commodity producers. Many of them are members of the S&P 500, such as oil giant Exxon Mobil Corp. (ticker: XOM) and agricultural producer Archer-Daniels-Midland Co. ( ADM). Other big commodity-producing companies are non-U.S. firms. Melbourne, Australia-based BHP Group ( BHP) operates in more than a dozen countries and extracts various commodities from oil and gas to coal, copper and iron ore — it's one example of a commodity stock that spans the globe. Another example is Barrick Gold Corp. ( GOLD), a Toronto-headquartered metals miner with international interests and gold and copper mining activities.

Buy a commodity ETF. Rhind notes there are several types of commodity ETFs. Some are indexes of commodity producers, such as the VanEck Gold Miners Equity ETF ( GDX), while some invest in the commodities themselves, such as the GraniteShares Gold Trust ( BAR) and the iShares Silver Trust ( SLV).

Some commodity ETFs invest in commodity futures — a futures contract is an agreement to buy or sell a particular commodity at a predetermined price at a specified time in the future. The iShares S&P GSCI Commodity-Indexed Trust ( GSG) tracks the S&P GSCI, formerly the Goldman Sachs Commodity Index, which comprises several commodity futures markets.

Buy physical commodities. The easiest way for investors to gain exposure to physical commodities is to buy precious metals such as gold, silver, platinum and palladium. These are available in coin and bar form from precious metals dealers. To find a reputable dealer, check to see if the dealer is a member of metals industry groups such as the Industry Council for Tangible Assets or Professional Numismatists Guild.

Commodities can be an inflation hedge. The current supply/demand shortage for many items, from semiconductor chips to beef, has many people worried about inflation. Tom Essaye, newsletter editor of the Sevens Report, says of the major asset classes — stocks, bonds and commodities — commodities are the most highly correlated to inflation, and commodity ETFs have traded well during periods of rising inflation.

He says investors interested in commodities as an inflation hedge could look to an ETF such as First Trust Group Tactical Commodity Strategy Fund ( FTGC), which has roughly $1.5 billion in assets under management and balanced exposure to agriculture, energy and metals. Additionally, at tax time, investors receive a 1099 form. Some commodity ETFs issue K-1 forms, which can cause additional work when filing taxes.

What to Know About Commodity Trading

Commodity trading is done on futures exchanges, such as the CME Group or Intercontinental Exchange, commonly known as ICE. Futures trading is usually the realm of professional traders, Rhind says, because it's a derivative. A derivative's value depends on the value of the underlying asset, such as crude oil or wheat.

Futures trade on margin, which is the collateral a trader puts up to trade futures contracts and is a percentage of the security's price. There is the initial margin to open a position and the maintenance margin to keep the account active. Commodity futures trading can be highly volatile, and traders can lose more than their principal, especially if prices fall significantly since the exchanges will make margin calls, requiring traders to put up more money to make the account whole.

Also, futures contracts have expiration dates, and traders must manage the rolling of the contracts, that is moving a position from an expiring contract to a new one, Rhind says. If a trader lets the contract expire, they must take delivery. Sometimes contracts are cash-settled, meaning the trader receives the monetary value of the contract, but some are physical delivery, which means the trader receives real goods of the underlying asset. "That could be gold, or that could be live cattle," he says.

The Risks of Investing in a Commodity

Investing in the commodities market brings risks that are distinct from the perils of the stock market or bond market, as many variables affect commodities pricing. The factors that influence the orange juice market are much different than those that affect soybeans or lead. For example, weather plays an important part in agricultural markets and has little impact on energy and metals, Rhind says.

In this space, prices are extremely volatile. Within a short time, commodity prices can peak and trough dramatically.

Since many commodities are international in nature, investment returns are also affected by changes in the exchange rates between foreign currencies and the U.S. dollar. Being a global market, there's potential for intervention, such as OPEC setting oil prices, Rhind says.

Should You Invest in Commodities?

This type of investing is risky and comes with tremendous volatility. The lack of correlation between commodities and typical stock and bond investments can be helpful at certain times, though commodity returns can drag down an investor's total returns during other periods.

Commodities investing is cyclical and distinct, so commodities offer varying returns. Over the past 10 years, the S&P GSCI index price peaked in 2012 near 713 and bottomed in April 2020 at around 230 — mostly dragged down by weak oil prices. It currently trades around 530.

The term commodity is not common, and some people may never have heard of it. However, understanding commodity investing can be a straightforward and robust addition to a trader’s investment portfolio.

Understanding Commodity Trading

Commodity trading has been in existence since the ancient times before the inception of bonds and stocks. In the past, it was a crucial business connecting different people and cultures. Today, commodities remain a popular investment instrument. Investors interested in venturing into the commodity market can do so in various ways. Let us discuss these methods below.

Investing in Commodities

Commodity investing differs from trading other investment options. One of the biggest challenges traders in Singapore face is that commodities are physical goods. There are four main ways through which traders can invest in commodities, as seen below.

  • Directly investing in the commodity
  • Purchasing shares of stock from companies that generate commodities
  • Investing through commodity futures contracts
  • Purchasing exchange-traded funds shares that deal with commodities

To invest directly in an actual commodity, you should establish where to find and store it. When you want to dispose of the commodity, you should search for a buyer and handle the delivery logistics. When it comes to commodities like precious metals, finding an online or local-based dealer can be easy.

With barrels of crude oil or bags of corn, making a direct investment in the goods can be challenging. Further, it requires more effort than some investors are ready to offer. Commodity futures contracts provide direct exposure to fluctuations in commodity prices.

How to invest in commoditiesSome exchange-traded funds trigger commodity exposure. As a result, traders in Singapore interested in remaining in the stock market can focus on the producers of a specific commodity.

When should you Invest in Commodities Directly?

Having a physical commodity saves you from intermediaries. Some of the best commodities that traders in Singapore can directly invest in are those that feature complex logistics. Gold can be a proper example since Singapore traders can make a significant gold investment without struggling to store or transport it.

Dealers sell gold bars or coins to investors, and they also purchase the goods back once the investor is ready to dispose of them. If you are looking for local dealers, you can do so through internet searches or word of mouth.

Remember, some local dealers are rated by regulatory bodies in Singapore for trustworthiness and reliability. To find online only dealers, search through the internet. Often, you will find testimonials and reviews on a dealer’s platform that will help you establish whether they are reliable and trustworthy.

What is the Downside of Owning a Commodity Directly?

In this case, transaction costs are usually high. For example, a dealer may charge a 2% or more markup in selling but offer a buying price that is below the market value. As a result, direct ownership is ideal for commodities that you look forward to holding for longer than a few days or even months. This way, you can lower total transaction costs by creating fewer trades.

How do Commodity Futures Contracts Operate?

Futures contracts give traders in Singapore another option to direct commodity ownership. These contracts trade on unique futures exchanges. They are contracts to purchase or sell a specific amount of a certain commodity at a particular time and price in the future.

Before you can trade commodity futures contracts, you should establish whether your Singapore stockbroker has futures trading options. In futures contracts, when commodity prices increase, the potential buyer receives an equivalent rise in the contract value. The seller, on the other hand, suffers a loss.

Again, if the prices reduce, the seller makes profits while the buyer makes a loss. Futures contracts are not ideal for many investors. However, they are perfect for bigger firms in that deal in various commodities.

Bottom Line

You do not have to own a big warehouse before investing in commodities. Apart from giving you high returns, commodities can protect traders in Singapore against high inflation periods.

The best way to invest in commodities is through a futures contract. It is an agreement to buy or sell a specific quantity of a commodity at a set price at a later time. Futures are available on every commodity category. Traders use these contracts as prevention towards the risks associated with the price swing of a futures’ indirect trade of goods or raw material. Trading in commodities involves a high amount of risk for amateur investors.

What are the advantages and disadvantages of futures?

Advantages of futures:

  1. Futures are highly leveraged investments
  2. Future markets are very liquid
  3. Futures give huge profits if traded carefully
  4. Affordable minimum-deposit accounts and controlled full-size contracts
  5. Long or short futures can be set as target easily

Disadvantages of futures:

  1. Futures markets are volatile
  2. Direct investment in the markets is of high-risk, especially for novice investors
  3. Gains and losses are magnified by leverage
  4. The unpredictable movement of trade even before you close your position

More than 100 commodities are traded in the commodity futures market. Out of these, 50+ commodities are actively traded. These include bullion, metals, agricultural commodities, energy products, etc.

What is Exchange Traded Funds and Exchange Traded Notes?

Investors can participate in commodity price fluctuations. Trading in commodities without directly investing in Futures is possible with Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN).

Using futures contracts, a particular commodity or group of commodities comprises an index. The price of these indexes is usually tracked by commodity ETFs. However, to simulate the fluctuations in price or commodity index supported by the issuer, ETNs are dedicated. ETNs are unsecured debts and both ETFs and ETNs do not require any special brokerage account to invest.

What are mutual funds and index funds in commodity trading?

It is quite impossible for direct investment of mutual funds in the commodity trading. Rather, there is an investment in stocks of the companies involved in commodity-related industries such as Energy, Food processing, or metals and mining.

Investing in stocks of such companies involve high risk, specifically company-related risks. The investment in a small number of commodity index mutual funds in future contracts provides direct exposure to commodity prices. Even though the management fee is slightly high and there is no fair play in the stocks, there are certain advantages of investing in mutual funds in commodity trading, including diversification of the investments, liquidity, and proper money management.

How to invest in commodities

Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia Financial Review Board and the co-author of Investing to Win. Gordon is a Chartered Market Technician (CMT). He is also a member of CMT Association.

Oil, gold, energy, and the famous orange crops from the movie Trading Places are all included in a type of investment known as commodities. Adding commodities to your investment portfolio creates exposure to different investment products, and helps to reduce risk, hedge inflation, and diversify your overall investing strategy.

However, unless you’re planning to open your own microbrewery, loading the back of your truck with bags of wheat, barley, and hops is the wrong way to buy commodities. Commodity exchange-traded funds (ETFs) are an alternative way to invest in commodities that keep you from becoming the neighborhood underground tavern.

Key Takeaways

  • Commodity ETFs let you invest in commodities without worrying about taking possession of the physical commodity.
  • There are ETFs designed around every commodity on the market, so there is no shortage of choices.
  • Commodities are volatile investments, but ETFs tend to reduce much of the risk.

What are Commodity ETFs?

Commodity ETFs are a simple way to include commodities in your investment strategy. You benefit by gaining exposure to the price and performance of any commodity without actually owning the commodity itself.

Commodity ETFs consist of stocks involved in the commodity or futures and derivative contracts that track the prices of the underlying commodities. In some cases, the ETFs track commodity indexes.

For example, one of the more popular commodity ETFs is the iShares S&P GSCI Commodity-Indexed Trust (GSG). In the case of this fund, you'll own futures contracts for different commodities like livestock, industrial metals, and agriculture assets. As a result, you gain exposure to various commodities, but you don’t have stacks of metal and herds of cattle in your backyard.

Types of Commodity ETFs

You can find commodity ETFs to fit just about any of your investing goals. There are broad-based commodity ETFs that track multiple types of commodities in one fund, like the iShares GSG. In addition, there are funds that track one particular commodity like oil ETFs, gold ETFs, and energy ETFs.

You can find sub-sector ETFs like solar energy ETFs that track only one type of energy.

Should You Buy Commodity ETFs?

One advantage of commodity ETFs is how they simplify commodity trading for investors. Without an ETF, you would make individual purchases of commodity futures or invest in commodity-related derivatives or companies. With an ETF, you can invest in your chosen commodities without purchasing a contract or becoming involved in physical trading.

In one trade, you have instant exposure to the price and performance of a particular commodity.

Then there is the decision of which futures or companies to choose. And even if you decide to invest in a commodity index, there is still the challenge of purchasing all the equities in the index basket to target a certain price. Commissions and complexities also make it hard to achieve your investing goals.

But in the case of a commodity ETF, you make one trade at one price and save on commissions. The commodity ETF is already bundled ahead of time.

Advantages of Buying Commodity ETFs

When you include commodity ETFs in your portfolio, the best attraction is the benefits they create for investors. Capital gains taxes aren’t incurred until the sale of the ETF, which gives ETFs a tax advantage over other investment products such as mutual funds.

There is also the advantage of having a simpler trade and lower commissions and management fees, among the many other benefits of ETFs. There are some disadvantages when trading ETFs, but if you understand how they work, commodity ETFs could be a great asset for your portfolio.

How to Invest and Trading Strategies

Before you trade any commodity ETFs, make sure to conduct plenty of research. Track the performance of the price of different commodities (like coal) and watch how some of the major commodity ETFs (like KOL, which tracks coal) react to different market conditions.

There is a lot of criticism about commodity ETFs that consist of futures contracts in that they have difficulty tracking volatile commodities. However, once you do have a good understanding of how commodities and commodity ETFs interact, you can get started by including commodity ETFs and ETNs in your investing arsenal.

While there is still investing, inflation, and market risk with commodity ETFs, they give you diversity to help hedge (nut not eliminate) these risks. However, you do inherit management and trading risk with any ETF.

The following strategies can help you make your first investments in commodity ETFs:

Commodity investing involves investing in raw materials that can be categorised into hard commodities that are extracted, such as oil and gas, or soft commodities that are grown, such as crops and livestock. There are several different ways to invest in commodities.

How to invest in commodities

Investing in the actual asset

The most direct method of commodity investing would be to purchase the actual commodity itself. Obviously this method only works with certain commodities, such as the precious metals, but nonetheless it is still a way to gain exposure in these markets.

If you wanted to invest in gold, for instance, you could purchase a gold bullion. This is a quantity of refined gold that adheres to standard conditions of manufacturing, labelling and record keeping.

However, there are many issues with this form of investment. You have the immediate issue of having to store the asset. This type of investment is also relatively less liquid than others, so it is subsequently more costly to exchange. Similarly, since a gold bullion is not divisible, its liquidity is increased.

Investing in an exchange-traded fund

Alternatively, many people who invest in commodities do so by investing in commodity-based exchange-traded funds (ETFs). An ETF is a fund that is traded on a stock exchange. An ETF can be comprised of many different asset classes from stocks, commodities or bonds. Some ETFs will aim to track the price of the underlying commodity itself, like physical gold ETFs. Alternatively, some will attempt to track a commodity through comprising an ETF that may hold stocks in companies that extract or mine that commodity. The latter type of ETF can be known to have a more divergent price from that of the underlying commodity.

Simple and intuitive platform

Investing in a futures contract

Commodities futures are agreements to buy or sell a given amount of a raw material at a particular price and specified date in the future. A trader gains money if the commodity appreciates or depreciates relative to the fixed price, depending on whether they take a long or short position respectively.

Futures are a derivative product, so you do not own the underlying commodity itself. Buyers may use futures to hedge against risks associated with price fluctuations (especially in more volatile soft commodity markets) and sellers can use futures to ‘lock in’ gains on their products.

Investing in CFDs on commodities

Investors can trade CFDs on commodities as a means of gaining exposure in the commodity markets. A contract for difference (CFD) is a derivative product, where there is an agreement (usually between a broker and an investor) to pay the difference in the price of an underlying asset between the start and finish of that contract. You trade CFDs on margin, meaning that you only have to put up a fraction of the value of your trade. Leveraged trading allows traders to gain more exposure with a smaller initial deposit.

Investing in commodities by trading CFDs brings many advantages. CFDs are exempt from stamp duty, owing to it being a derivative product, so you would have fewer costs trading CFDs.

Read more about commodities trading:

How to invest in commodities

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Investing in shares can seem rather impersonal when all you have to look at is a bit of paper (or more likely an electronic record) that tells you that you own a tiny piece of a company. If that company goes bust, you have nothing to show for it.

If you invest in commodities – raw materials that range from metals (both precious and industrial), energy sources (oil and coal) and agricultural goods (such as coffee and wheat) – you have a share in something physical that you can theoretically touch and smell.

But like shares, the value of these tangible assets goes up and down depending on demand, good and bad weather, political or economic crises or other influences on supply.

Since not all commodities are the same their values don’t rise and fall together either. Each can be volatile and therefore risky. The one thing they have in common is these raw materials don’t pay interest or dividends, unlike bonds and many shares.

When the coronavirus crisis hit stock markets in spring 2020, oil prices collapsed along with industrial metals such as copper as the brakes were slammed on global economic activity.

Agricultural commodities weren’t hit as hard, though there were exceptions. A strong US nut harvest meant prices fell, according to reports on Bloomberg news 1 .

Precious metal prices by contrast rose strongly in the wake of the crisis. Luke Pearce, Investment Strategist at Barclays says these metals can come into their own in such a situation. He says: "Gold is a particularly popular store of value in troubled times with investors often putting a high price on the yellow metal when yields from other assets fall. With bond yields hovering around all-time lows, and central banks around the world committing to keep interest rates on hold, the perceived opportunity cost of holding gold is low for many investors."

In late 2020, when hopes of economic recovery were buoyed by the development of a trio of Covid-19 vaccines the prices of many other commodities started to recover strongly, including oil and industrial metals such as copper. The latter is often seen as a barometer of economic optimism because of its importance in manufacturing and infrastructure development 2 .

Why consider commodities?

Barclays’ Luke Pearce says there are two main reasons to think about including commodities in a portfolio. He says: "They can add diversification and also act as protection against future inflation."

1. As a means of diversification

Commodities typically have low correlation to other types of assets, such as shares and bonds. Pearce says: "This means that commodities may perform differently at times of market volatility, potentially helping to offset losses from other investments."

If share prices fall, then hopefully commodity prices won’t go in the same direction, although this cannot be guaranteed. Remember that investments can fall as well as rise, and some commodities are considered among the riskier asset classes as they are generally more volatile than other investments. You may get back less than you invested. Past performance is not a guide to future performance.

2. As a hedge against inflation

Including commodities in your portfolio may help you weather future inflation. Commodities have in the past performed well during inflationary periods even when shares and bonds fell in value. The rationale is that when demand for goods and services increases, so do prices (causing inflation) and so do the prices of the commodities used to produce them.

By 2020 inflation had been running at low levels for several decades, which meant the price of commodities on average performed weakly. But with hopes of global economic recovery post coronavirus, intervention by Governments and central banks to stimulate economies and signs in late 2020 that the US central bank, the Federal Reserve, was preparing to make its inflation targets more flexible, inflation could start to rise again. This could provide an argument for holding commodities as a hedge against rising prices.

But remember as with all investments commodities can rise and fall in value. This asset class can be highly volatile and would-be investors need to be prepared for what can be a potentially bumpy ride because while the gains can be significant, the falls can be even steeper and you may get back less than you invested or even lose all your money.

How to hold commodities

Few people invest in commodities as a physical asset – and even if they do (perhaps they have a few gold bullion bars), there are storage costs and insurance to consider. Not many investors have the space to store a barrel of crude oil or keep fresh a one-ton sack of coffee beans (a standard bag size for exporting beans 3 ).

So instead most investors usually get their exposure via a fund or Exchange Traded Commodity (ETC) that in turn invests in these tangible assets. Even then the fund managers don’t always buy the real thing. Instead they might purchase the shares of companies that operate in a particular commodity market, such as oil or mining. More likely they will purchase ‘derivatives’ called futures. This is in effect a ‘promise to buy’ the commodity at a set price in the future.

Barclays’ Luke Pearce says: "As the date of expiry comes nearer you can roll over the future so you never actually take delivery of the commodity."

You might wonder how to decide what type of commodity or what proportion to invest in commodities if any. To give you an idea, Barclays experts look at specialist indices for guidance. One of these is Bloomberg Commodities Total Return Index. This tracks a basket of 20 or so commodities, including gold, crude oil, copper and corn. Our experts tend to allocate no more than a single or low double digit percentage to a portfolio, depending on their overall outlook for commodities.