The advantages of investing in commodities over shares in commodity producers

Commodity investments offer low correlation to more traditional asset classes like equities and fixed income and therefore can be used for diversification and thus a better overall risk return profile for a portfolio of assets.

The choice between investing in the physical or the underlying equity for the likes of gold and platinum has been made a little easier with the advent of ETFs (or exchange traded funds) which allow easier access to the metal. ETFs (Exchange Traded Funds) are liquid, allow daily trading and provide the access to a store of value which should provide diversification to an overall portfolio, particularly in times of market distress.

The cost of ETFs also make them an attractive offering as one can often access the underlying metal at a fraction of the trading cost for equities. Commodities do tend to be quite volatile so one should be careful in the allocation/weighting to the asset class within a broader portfolio.

The movement of commodity prices has become increasingly volatile with the central bank interference in markets since the 2008 financial crisis. The massive printing of money initially resulted in a large increase in value for both gold and platinum, however the prices soon became quite dependent on this printing and thus more volatile as sentiment swung to and fro. Purchasing the equities provides exposure to movements in the underlying metal prices but this is diluted by the general equity like characteristics and associated market correlation. Equities can also provide a dividend stream which could be useful depending on an investor’s cash flow requirements.

Commodity prices are currently quite low having had a poor run recently, with gold miners in particular being the hardest hit. This could prove to be an attractive entry point for investors who should look to base their decision on how to access the asset class on an assessment of current portfolio, costs, valuation and time frame.