Why Now Is a Good Time to Invest in Commodities (2024)

FAQs

Why Now Is a Good Time to Invest in Commodities? ›

Commodities stand to benefit from underinvestment and the clean energy transition. PIMCO has a positive outlook for commodities based on supply constraints, the transition to a net-zero economy, and their historical correlation with inflation.

A: In the near term, U.S. headline inflation looks likely to moderate, but core inflation has remained stubbornly high. Critically, commodities have tended to benefit from their extremely tight link with both inflation and inflation surprises. We foresee a mild recession in 2023.

Investing in commodities can provide investors with diversification, a hedge against inflation, and excess positive returns. Investors may experience volatility when their investments track a single commodity or one sector of the economy. Supply, demand, and geopolitics all affect commodity prices.

Do commodities do well during inflation? Commodity prices tend to increase when inflation is on the rise, therefore investing in commodities may provide a good hedge against inflation for investment portfolios.

You can invest in commodities in a range of ways. Today, the top three in the list of commodities are crude oil, gold and base metals. It is worth taking a look at all three and finding out how to invest.

Commodities don't do well in recessions

By contrast, gold has tended to shine during recessions as investors have reached for their safe-haven status. At the same time, the loosening of monetary policy and lower real interest rates has typically supported gold prices during economic downturns.

The value of most commodities in a recession – such as industrial metals, agricultural products and energies – all comes down to whether they are perishable or not. If a material cannot be stored for long periods of time, then its value is likely to decline during a recession when demand falls.

Because commodities prices typically rise when inflation is accelerating, they offer protection from the effects of inflation. Few assets benefit from rising inflation, particularly unexpected inflation, but commodities usually do.

Stock markets are considered risky investments. However, compared to commodity markets, they are said to be less risky since stock investing is more long-term.

Uncontrollable factors such as inflation, weather, political unrest, foreign events, new technologies and even rumors can have devastating consequences to the price of a commodity. Investors investing in commodities must be able to bear a total loss of their investment.

Will commodities make a comeback? ›

The longer-term bull market in commodities could resume in 2024. Supply will continue to be challenging as the world transitions away from traditional energy to more renewable sources of energy.

A long-running debate in asset allocation circles is how much of a portfolio an investor should allocate to commodities. Conventional wisdom often dictates that the ideal percentage is 5% to 10%.

Precious Metal

Precious metals like gold and silver have high economic value and act as a great hedge against rising inflation. Gold has been readily used as an alternative currency in weak economies, commonly referred to as the gold standard.

Commodity prices are projected to experience a slight downturn in 2024 and 2025 but are expected to remain above pre-pandemic levels.