Best Commodities To Buy

Find the best commodities to buy with Interactive Brokers.

Rising inflation has reduced not only your purchasing power but also the value of your portfolio. When the stock market is declining sharply, you may look to other assets that can provide better returns.

Are you looking to invest your money and diversify your portfolio? Have you considered investing in commodities? Commodities can provide a hedge against inflation and market volatility, and can even offer a potential for profit in the long term.

Commodities are raw materials that are either extracted from the earth or grown, such as gold, oil, wheat, or coffee. They are traded on commodity markets, where their prices fluctuate based on supply and demand factors. Investing in commodities can be a wise decision, but it's important to know which ones to choose.

In this article, we will explore the best commodities to buy for investment purposes. We will discuss their historical performance, current market trends, and potential for growth. Whether you're a seasoned investor or just starting out, this guide will help you make informed decisions on which commodities to add to your investment portfolio.

5 Best Commodities To Buy

Commodity prices are tied to supply and demand. As such, just because stocks are declining does not mean every commodity is a viable investment for your portfolio. If you are looking for a hedge against market volatility, here are the best commodities to buy.

Oil

Oil is critical to the modern economy because of its use to power machines and automobiles, as well as the wide range of oil by-products. Not surprisingly, supply chain challenges caused by the pandemic, along with Russia's invasion of Ukraine, sent oil prices to their highest level in about a decade. 

Though oil prices have since come down, additional factors could give the commodity a boost. The Russia-Ukraine war shows little signs of easing, and the Organization of the Petroleum Exporting Countries announced a cut in oil production. As long as demand continues and supply remains constrained, oil prices could continue marching higher.

Natural Gas

Russia’s invasion of Ukraine has placed pressure on natural gas supplies. Following sanctions imposed by Western countries, Russian weaponized its precious commodity, cutting off gas supplies to European countries through the Nord Stream pipelines. Given that Russia is the second largest producer of natural gas in the world and accounts for 40% of the EU’s supplies, the pressure on global gas has sent prices higher.

Copper

The drive for clean energy has increased demand for solar panels and electric cars. Copper inventories are vital because copper plays a key role in renewable energy systems. Also, national governments are taking cues from the current rise in oil prices to increase their transition towards alternative energy. 

Wheat

Russia and Ukraine together supply about a quarter of the world’s wheat. The war, coupled with bad weather, has sent wheat stockpiles low and raised the possibility of food shortage. This constraint has sent not only food prices higher but also the price of this commodity.

Lithium

Lithium is another commodity benefitting from the growing demand for electric cars. Global supplies are under pressure because lithium is a key component in electric vehicle (EV) batteries. Legacy automakers like General Motors, Ford Motors and Volkswagen racing to catch up with front-runner Tesla and have been investing billions of dollars to bring their EV factories online. This has resulted in automakers striking deals with lithium producers to lock down scarce supplies. 

What Are Commodities?

Commodities are raw materials that are either consumed directly, like food, or processed into other products. In finance, commodities are another tradeable asset class (like stocks, bonds, currencies, and real estate). Commodities include agricultural products (corn or wheat), livestock (cattle, pork), base metals (aluminum or copper), precious metals (gold or silver) and energy products (natural gas or crude oil). 

Commodities investing can be valuable because it offers diversification and acts as a hedge that reduces risk and the impact of market volatility on your portfolio. You can invest in commodities through futures contracts, buying stocks of commodity companies, exchange-traded funds (ETFs), mutual funds or exchange-traded products (ETPs) that directly track a specific commodity index. 

Advantages of Commodities Investing

Commodities investing can offer benefits for your portfolio, including: 

• Diversification: A major benefit of commodities investing is that it can be used to diversify an investment portfolio. Commodities tend to provide returns that differ from other assets like stocks and bonds. When other asset classes are suffering, commodities might offer performance that counteracts losses.
• Potential returns: One advantage of trading commodities is the potential returns. Following supply chain bottlenecks caused by the pandemic and ensuing inflation, prices of commodities have spiked. Commodities can be expensive to transport and produce or require long lead times to extract (like oil). Disruptions in the production cycle could lead to price hikes. 
• Inflation hedge: Inflation is partly driven by a rise in commodity prices. As the cost of buying, transporting and processing commodities increases, higher production costs are passed to consumers. On the other hand, stock prices tend to fall with inflation because it reduces company earnings. As a result, commodities can be a good hedge against inflation. 

Popular Commodities Exchanges

Many global exchanges offer commodities products for trading. Let's take a look at some of them.

• The Chicago Mercantile Exchange Group (CME Group): The CME Group is made up of four commodity exchanges: The Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), Commodity Exchange Inc. (COMEX) and The New York Mercantile Exchange (NYMEX). On average, its exchanges handle $1 quadrillion worth of trades spread over 3 billion contracts annually. Let's look at each exchange that makes up the group.
• CME: Also known as the Chicago Merc, the CME was founded in 1898 as the "Chicago Butter and Egg Board," an agricultural commodities exchange. Currently, the CME is a global derivatives marketplace that offers financial products like interest rates, equities, currencies and commodities. 
• COMEX: COMEX is the primary futures and options market for trading metals such as gold, silver, copper and aluminum. It was founded in 1993 after four exchanges (The National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange and the New York Hide Exchange) merged. COMEX is the most liquid metals exchange in the world, with over 400,000 futures and options contracts executed daily. 
• CBOT: The Chicago Board of Trade (CBOT) is a commodity exchange established in 1848. The exchange was established to remove price uncertainty in agricultural products, which made it attractive to farmers and commodity consumers. The CBOT later started offering trading of options and futures contracts on a wide range of commodities.
• NYMEX: The New York Mercantile Exchange (NYMEX) is the world's largest physical commodity futures exchange. The exchange makes up 10% of the total trades in the CME Group.
• ICE Futures: The Intercontinental Exchange (ICE) is an Atlanta-based company that owns and operates financial and commodity marketplaces and exchanges. Founded in May 2000, ICE operates futures exchanges, cash exchanges, central clearing houses and market services for off-exchange trading in various markets (U.S., U.K., EU, Canada, Singapore and Abu Dhabi).
• The London Metal Exchange (LME): LME is the largest exchange commodities exchange for futures and options on base metals. Prices quoted on the LME are considered to be the standard global prices for base metals. Its establishment can be traced back to 1571 when the Royal Exchange was established in London. Currently, the LME is owned by Hong Kong Exchanges and Clearing.
• Tokyo Commodity Exchange (TOCOM): TOCOM is a commodities futures exchange founded in 1984, following a merger between the Tokyo Gold Exchange, the Tokyo Rubber Exchange and the Tokyo Textile Exchange. TOCOM offers futures and options contracts for agricultural products and precious metals. TOCOM is currently owned by Japan Exchange Group following its acquisition in 2019.

Invest in the Commodity Market Today

The best commodities to buy depend on a variety of factors. Your individual financial goals, risk tolerance, and market conditions are all important considerations. However, some commodities have shown consistent performance and lower volatility over long periods of time, making them worthy investments.

Compare Commodities Brokerage Accounts

Trading in physical commodities like oil or natural gas is difficult because most investors don’t have the means to transport or store them. As a result, most commodities are traded using derivatives like future or options contracts that don’t necessarily require actual delivery of the commodities. Other market participants, like farmers, can also hedge their risk through these markets.

Benzinga offers reviews on the best futures commodities brokerage accounts to trade. Find a commodities hedge to diversify your portfolio.

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