Takeaways
- Commodity investments diversify your portfolio and are an essential asset class.
- Commodities are bought through exchanges, like the Chicago Mercantile Exchange.
- Commodities, like gold and precious metals, are used to hedge against inflation.
- Investors can gain exposure to commodities through futures trading, commodity stocks, and ETFs.
- Commodities are used as inputs to higher-order materials and goods throughout the economy.
What Is a Commodity?
A commodity is a good or material, such as raw minerals and agricultural products, that is used as an input to produce higher-order goods and materials.
Commodities are one of the building blocks of the entire global economy and serve as essential sources of production inputs for a range of goods and services you use daily. They fall into two categories:
- Hard commodities are materials that need to be mined or similarly removed from the earth. Examples include gas, oil, and gold.
- Soft commodities are products derived from livestock or agriculture. For example, corn, beef, coffee, and wheat are soft commodities.
In the market, the dynamic push and pull of supply and demand determines the value of commodities. When there is more demand than supply, prices for commodities tend to rise due to scarcity. On the other hand, price compression occurs when supply exceeds demand.
Commodities are an invaluable component of a well-diversified investment portfolio. As a distinct asset class, commodities can diversify your portfolio and act as a hedge against inflation. Investors can invest in commodities through various mechanisms, such as futures contracts, exchange-traded funds (ETFs), and mutual funds focused on commodities.
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How Commodities Work
Nearly all commodities are essential raw materials for production. They are traded globally in commodities markets at prices primarily determined by supply and demand.
You can invest in commodities in spot markets, which offer immediate delivery. Alternatively, investors can participate in futures markets, which are governed by contracts that promise a set price in the future.
When dealing with commodities futures, you will generally use futures contracts to speculate on the future movement of the commodity’s price.[1] These contracts bind the buyer to buy or the seller to sell a set quantity of a commodity at a specific price at a particular time in the future.
Commodities are traded on various platforms, such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). These exchanges create a fairer, more regulated environment for trading standardized contracts and promote participants’ transparency.
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4 Ways to Purchase Commodities
Investors can gain direct or indirect exposure to commodities in various avenues to diversify their portfolios. Here are several different ways:
- Spot Purchases: Commodity spot trades are made with the understanding that physical delivery of the raw materials or goods will occur within a couple of days of transaction settlement. Therefore, you can purchase physical gold, corn, wheat, or other commodities in the spot market.
- Futures Contracts: Commodity futures, also called future markets, differ from spot markets because a commodity futures contract is bought and sold well before physical delivery. A future, or forward, contract is an agreement on the price, amount, term, and delivery of a specific commodity.
- Commodity ETFs: Commodity ETFs are a step further removed from direct commodity ownership. They can be easily bought in an online brokerage account and traded during regular market hours. There are three main varieties of commodity ETF exposure: physical commodities ETFs, equity-based commodity ETFs, or futures-based commodity ETFs.
- Commodity Stocks: Another way to explore commodities is to purchase stock in a company whose primary business is developing or extracting them. For example, you can buy shares of gold mining or oil drilling companies.
5 Common Commodities
Investors spliced commodities into different categories, like energy, metals, agricultural materials, or products. Here are five popular commodities on the markets today, each one playing an essential role in the broader global economy
1. Crude Oil
Crude oil is one of the most widely traded and critical commodities, with a market size of over $2.1 trillion.[2] It serves as a primary energy source for countless applications, from transportation to electricity generation. Crude oil is extracted from the earth and refined into things like diesel, jet fuel, and ordinary gasoline.
Crude oil’s price in the commodities markets is primarily impacted by geopolitical events, production decisions by oil-producing countries, and drilling restrictions. Oil is one of the more highly volatile commodities, and prices can fluctuate significantly in short periods. Investors who speculate on price movements or use oil to hedge the risks of other asset classes can exploit this volatility.
2. Natural Gas
Natural gas is a cornerstone energy commodity for power generation, heating, and industrial uses. Many investors considered it a cleaner alternative to crude oil or coal because it has lower carbon emissions. Delivering natural gas to consumers is done through a complex system of transporting natural gas from gas and oil wells.[3]
Read More: What Is ESG Investing?
Things like the overall seasonal demand, weather, and disruptions or changes in the supply chain impact the price of natural gas. Similarly to oil, natural gas futures are traded on commodity exchanges, which lets investors speculate on price shifts or manage their exposure to the risk of price volatility. As investors in the U.S. and abroad focus more on reducing carbon footprints, the demand for natural gas will likely continue as a transitional energy source.
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3. Gold
Gold is a prized precious metal for its rarity, beauty, historical significance, and extraction difficulty. It has been used for thousands of years to preserve value in jewelry and currency and as an investment asset.
Investors consider gold a haven asset, meaning they view it as the safest place to store value and wealth during inflation, economic uncertainty, or geopolitical instability. Factors like political stability, inflation rates, and changes in interest rates typically drive the price of gold.
One of the most popular ways to invest in gold is through physical ownership of gold bullion, which is gold in the form of coins, bars, or ingots. You can also buy gold-focused ETFs and futures contracts. The enduring value of gold makes it a popular choice for adding diversification, risk mitigation, and conservatism to portfolios nearing retirement.
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Many investors view cryptocurrencies like Bitcoin as the new store of value against inflation.
4. Beef
Beef is a highly significant cattle-based agricultural commodity. It is a dietary staple in the U.S. and abroad and critical to the worldwide agricultural economy.
Variables like feed costs, weather, and disease outbreaks in herds or processors move the commodity price of beef. The beef industry faces challenges related to sustainability, with an increasing focus on reducing carbon emissions and improving animal welfare.
5. Grains
Grains like corn, wheat, and soybeans are foundational agricultural commodities used for various products, from food to biofuel production.
Grains are staple crops that form essential links in dietary chains worldwide and play a critical part in global food security. Their production and distribution are part of the core stability of the agricultural market.
Where Are Commodities Traded?
Publicly traded company stocks are listed on stock exchanges like the NYSE or NASDAQ, and commodities are traded on specialized commodity exchanges.
Some of the most popular commodity exchanges are the Chicago Mercantile Exchange, the London Metal Exchange, and the Intercontinental Exchange.
Within the exchanges, there are two primary commodities markets:
- Spot Market: Where trades are made and settled on the “spot.” In the spot market, goods are available for immediate delivery.
- Futures Market: Contracts lock in a specific price, a set amount of goods, and a future delivery date.
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Commodity vs. Securities
Commodities and securities are both popular investments. However, they differ in several fundamental ways:
- Commodities are physical goods and raw materials used to produce other goods. Their idiosyncratic markets affect their prices, which are most heavily influenced by supply and demand. Investors can buy commodity futures or take delivery of commodities like wheat, corn, or gold.
- Financial securities are tradable assets representing a share of ownership in a company or debt obligation. Stocks are equity ownership in a company, and bonds are fixed-income debt obligations. Investors use online stock brokerage accounts to trade securities, which are paper contracts that do not reflect the receipt of physical goods or services.
Smart Summary
Investing in commodities can be a smart money move if you need to add diversification or hedges to inflation into your investment portfolio. Whether you use a robo-advisor or a financial advisor, determine if investing in commodities is the best decision based on your current portfolio, investment expertise, and long-term financial goals. Commodities can be a terrific store of value for the right investor. Learn about investment strategies for beginners.
(1) Community Futures Trading Commission. Customer Advisory: Learn About Risks Before Investing in Commodity ETPs or Funds. Last Accessed January 15, 2025.
(2) Visual Capitalist. How Big is the Market for Crude Oil? Last Accessed January 15, 2025.
(3) U.S. Energy Information Administration. Natural gas explained. Last Accessed January 15, 2025.
