Five tips for investing in gold, silver & other commodities

Exposure to commodities can be beneficial during an inflationary environment, but they can be very volatile investments. Here are some tips to help you.

| 7 min read

An upturn in commodities markets has piqued the interest of investors looking for ways to benefit from higher global inflation. Precious metals have also benefitted from geopolitical uncertainty, while industrial metals have risen owing to positive more positive economic momentum, notably in China.

However, investing in commodities is specialist and not for the faint hearted. Here’s five things to consider when looking at the asset class.

Five tips for investing in gold, silver and other commodities

1. You can invest in commodities via an ETC…

    Commodities could be worth backing in an investment portfolio, should higher material-driven inflation persist and prevent interest rates from being cut. Some such as gold can be bought as coins or bullion and held personally, though a more convenient way is to invest in an Exchange Traded Commodity (ETC).

    There are ETCs for all kinds of commodities: precious metals such as gold silver and platinum; base metals such as copper and lead; energy commodities such as oil and natural gas; and soft commodities such as sugar or coffee.

    For exposure to the gold price a low-cost ‘tracker’ such as iShares Physical Gold ETC is one way to participate. It physically holds gold bullion as allocated bars in a vault with a custodian, has low annual charges, and owing to its large size it tends to be easy to trade with a tight ‘spread’ between the buy and sell prices. It’s a convenient way to buy into a timeless asset and store of value.

    2 …but beware of the volatility

      Commodities can be very volatile investments as they tend to be tied to a cycle of supply and demand with low prices leading to higher prices and vice versa. Lots of supply depresses prices but curtails investment in producing the commodity, potentially leading to greater scarcity and higher prices further down the line.

      Over long periods prices tend to trend higher, but the ups and downs of the shorter-term cycles, which can have multiple drivers, can be brutal. The higher risk nature means commodities should only ever represent a small proportion of a portfolio.

      ETCs should therefore be treated with caution, in particular those whose underlying assets are derivatives rather than the physical commodity itself. Derivatives-based ETC’s are usually based on futures contracts that must be renewed periodically, and this can result in a capital loss for investors even if the ‘spot’ commodity price doesn’t change. Always make sure you read the fund literature including the Key Investor Information Document (KIID) to understand the product before investing.

      Some individual commodities are also notoriously volatile. For instance, silver is often buffeted by conflicting trends, being both a precious and an industrial metal. It can experience wild swings and its longer-term performance has been poor.

      Astonishingly, silver stands well below it’s all time high over 40 years ago, though this is seen by many as an artificial spike created by the infamous Hunt brothers ‘cornering’ the market, intentionally or otherwise. A more genuine high for silver came in 2011 at $48-an-ounce, and again this is a lot higher than the most recent price spike at around $32.

      3. Commodities related shares offer an alternative way to benefit from rises

        Shares in mining companies can be an alternative means of exposure to the price of metals. They tend to represent a ‘geared’ play, meaning they multiply the effect of a rise – but also any fall. This is because profits can be highly sensitive to the price, and riskier firms could even swing from profit to loss or vice versa on these moves.

        Yet shares in miners or other commodity producers don’t always do a good job of reflecting the performance of the underlying asset. For instance, gold mining shares have lagged a long way behind the bullion price in recent years. This can be for a variety of reasons. Sometimes the cost of production can rise, offsetting the any revenue gains from higher prices. There can also be company specific operational issues, or for those operating in more unpredictable regions the threat of geopolitical unrest.

        This area should only be a small position in a typical portfolio given its highly specialist and risky nature. Follow the link to find out how to review your investment portfolio.

        4. Commodities could be a way to benefit from the digital and green revolutions

          The rise of artificial intelligence promises to change the world in many ways, enhancing productivity across many business areas. It is also very energy intensive compared to traditional work practices. Sam Altman, the CEO of OpenAI, recently claimed energy “is the hardest part” in satisfying AI computing demand.

          The 24/7 demand profile of AI data centres will require the need to grow both easy to scale renewable energy sources like wind and solar, which are intermittent in nature even with the use of batteries, together with baseload power from established energy sources, such as natural gas.

          Meanwhile, the transition to cleaner, sustainable energy sources and a lower carbon world is one of the defining trends of this decade. Investors can harness it in several ways, but an interesting route could be through investing in the companies producing the industrial metals vital to making change a reality.

          5. The gold price is rising despite outflows from ETFs

            Gold has a traditional status as a store of value and hedge against inflation. It can act as a diversifier for those with broad portfolios who want to add something different that isn’t necessarily correlated to the prices of other assets.

            Gold investments can sometimes defy falling markets in times of market volatility and can offset inflation over long periods compared with the spending power of major currencies. Gold is a store of value rather than a productive asset, so it is generally regarded as less appealing during periods when interest rates look set to rise because it generates no income.

            The gold price has been hitting new highs recently, a curious performance given that outflows from ETFs (Exchange-Traded Funds) backed by physical gold keep climbing. It appears that investors in developed markets are net sellers as the World Gold Council reports eight straight quarters of outflows.

            So why the rise? The demand appears to be coming from the East with activity in China picking up, perhaps amid speculation surrounding a possible devaluation of the Chinese currency, the Renminbi. With the Chinese central bank increasingly channelling reserves into gold, some institutions and private investors appear to be following suit in search of a ‘hard asset’ haven.

            Is your portfolio working hard enough for you?

            If you are unsure of the level of risk you should be taking or which types of investments to consider, an Investment Portfolio Review with a professional can help provide fresh insights going forward.

            See more

            Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

            Five tips for investing in gold, silver & other commodities

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            Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.