All eyes are on the commodities market. February began with silver futures surging some 13%, hitting an eight-year high following a 6% spike from the week before, possibly influenced by online forums. And while silver led the way, copper followed suit. Like the GameStop phenomenon, it’s one that’s left many with more questions than answers.
What’s a commodity?
When people think about investing, they typically think of stocks, bonds and cash first. But there’s another option: commodities.
“Silver, gold, wheat and natural gas are all examples of commodities,” said Steve Wyett, Chief Investment Strategist at BOK Financial®. “These are raw materials that can be bought as an investment or as a means to make other products. They’re tangible.”
Commodity prices move independently of traditional assets like stocks and bonds.
How do you invest in one?
You’ve got options. The first option is to buy commodities in their physical form, such as silver coins or gold bars.
“You can buy, and take delivery, of physical commodities like silver or gold,” said Wyett. “It’s a less likely scenario with other commodities like wheat. Because who wants 5,000 bushels of wheat delivered to their house?”
Those who have a need for the product are called hedgers, and those who are investing but don’t have use for the commodity, are called speculators.
“A cereal company investing in wheat, for example, is hedging. Someone who invests in silver but doesn’t want silver delivered to their doorstep is a speculator.”
Another option for investing in commodities is to invest in commodity companies, like oil and gas or mining companies, through stocks and bonds.
“The most common option is buying an ETF, or Exchange Traded Fund, that invests in commodity futures,” said Wyett. “Futures are essentially just purchase agreements between traders outlining the price at which parties agree to buy or sell.”
Why are commodities such a, um, hot commodity now?
“The recent run on silver wasn’t directly influenced by supply and demand. There are more silver shares outstanding than the ability to deliver silver against that. So, there’s theoretically potential for a short squeeze situation,” Wyett said. “Though the chances weren’t nearly like they were with GameStop.”
Shortly after the silver spike came the copper boom. In the same month that saw silver surge to eight-year highs, copper prices climbed to their highest level in nearly a decade.
Wyett said precious metals often have been seen as a hedge against inflation, which is another contributing factor to the sudden increase.
I’m thinking of investing in commodities. What do I need to know?
Wyett recommends considering a few principles that influence the commodities sector before you invest:
- Supply and demand is a huge factor.
- Inflation is especially relevant in commodities like precious metals.
- Interest rates matter.
- Weather plays a pivotal role in agriculture and oil and gas commodities, but also impacts others due to transportation needs.
- Changes in government policy and regulation could impact production volume, methodology, transportation, and more.
“Because of how all of these factors work together, the prices in commodities can fluctuate dramatically in short periods of time,” he said. “And it doesn’t take much of a price movement for investors to make or lose a lot of money relatively quickly.”
Historically, commodities have been one of the most difficult asset classes to trade at a consistent profit, Wyett cautions. “If you want to know how to make a small fortune in commodities, the key is to start with a large fortune. Hence, we generally don’t recommend people attempt to trade commodities on their own—this is tough terrain.”