Hard vs. Soft Commodities

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Commodities are timeless resources that give investors a valuable hedge against inflation. Getting exposure to this asset class can minimize losses during market downturns, as some of these assets can gain value when stocks go down. While investors can choose from many commodities, they fall into two categories: hard or soft. This guide will reveal the differences between hard vs. soft commodities and what to know before you consider investing in them.

What Are Hard Commodities?

Hard commodities are natural resources within the earth that hold value. Oil, gold and silver are some of the many hard commodities available. These commodities don’t expire. The gold coin you get now will still hold value 1,000 years from now.

What Are Soft Commodities?

Soft commodities are agricultural products and livestock. While this asset class always holds value, individual assets within it can lose value for reasons outside of supply and demand. 

For instance, a disease that only affects one farm will make that farm’s eggs less valuable. People have to continuously replace agricultural and livestock products since they aren’t evergreen like precious metals. However, it is also easier for civilizations to replace soft commodities than it is to replace hard commodities. 

Hard vs. Soft Commodities: Key Differences

Hard and soft commodities are both types of alternative investments that act as inflation hedges. However, a few key differences influence how these assets’ prices fluctuate. Here’s what investors should consider before deciding how to allocate their capital. 

Physical Properties

Hard commodities retain their physical value for many years, while soft commodities have much shorter life spans. While precious metals and other minerals extracted from the earth last for thousands of years, livestock like chickens only live for 5-10 years. Soft commodities are living organisms or originate from them, while hard commodities are inanimate objects. 

Market Behaviors

Both types of commodities react to economic and geopolitical news, but soft commodities have other factors that influence prices. Weather changes can impact the supply of crops, eggs and other agricultural products. Any decreases in supply will increase the price of commodities. While this scenario results in a more expensive grocery bill, it’s good for investors who bought those commodities in advance.

Economic and geopolitical policies that change the supply and demand of commodities will impact their prices. For instance, if central banks continue to invest in gold, the precious metal’s price should continue to rise. Some commodities react to different conditions. If multiple commodities react to the same condition, one commodity may react more strongly than others.

A booming industrial sector is good for gold and silver. Still, positive developments are more beneficial for silver since silver derives more of its value from the industry than gold. 

Trading Patterns

Hard and soft commodities have price fluctuations based on macro and industry-specific news. Traders often use futures contracts to get exposure to hard and soft commodities, but investing in these assets with mutual funds and ETFs is possible.

Traders can use technical analysis for either of these asset classes to predict how prices may move next. Some commodities are more volatile than others. Precious metals like gold and silver are among the least volatile commodities. Soft commodities have more volatility since additional variables, such as weather changes and diseases, can result in sharp price swings. 

Storage

Soft commodities are more expensive to store and require more effort. While you can put gold in a safe, you can’t necessarily do that with a cow or a chicken. Soft commodities are perishable assets that require more storage space. Farmers need large farms to accommodate plenty of livestock, while you don’t need nearly as much space for gold storage. 

Soft commodities are a bit more difficult to manage. Investors must ensure that they provide sufficient care for crops and livestock. Hard commodities don’t require nearly as much effort.

Transportation

Transporting soft commodities is more expensive than transporting hard commodities. Soft commodities require more storage space. Meanwhile, hard commodities like precious metals and oil can be stored more efficiently. Soft commodities can spoil more easily, so investors may need transportation solutions with temperature-controlled environments. 

Due to their value, some hard commodities require strict transportation procedures. To transport certain resources, you will need to work with a specialized logistics company. 

Investment Considerations

Investors should assess their portfolio allocations and risk tolerances when deciding if commodities are right for them. Hard commodities have a greater shelf life, which gives them more time to appreciate. On the other hand, soft commodities are perishable and are subject to greater volatility. 

While commodities require higher risk tolerances than typical investments, soft commodities require a greater risk level than hard commodities. 

Diversifying into Hard and Soft Commodities

Hard and soft commodities can make your total returns less correlated with the stock market’s performance. This distinction can minimize your losses during market corrections, but these are more volatile assets than average. The easiest way to get started with commodities is to look for a mutual fund or an ETF that gives you exposure to those assets. You can also trade futures contracts when you get more comfortable with these assets.

Frequently Asked Questions