Investing in raw materials in 2022: When is it worth buying?

Zalim
October 12, 2021
Investing in raw materials are popular for energy supply or as a building material and with investors, and the raw material investment is trendy.
investing-in-raw-materials
Trading in raw materials: investing in raw materials in three steps

Step 1: Open an account with an online broker

To trade raw materials, you first need a securities account, compare different online brokers.

The advantage: Regulated brokers are subject to deposit protection, so their assets are still protected in bankruptcy. In addition, you do not have to worry about storage. Instead, the broker takes care of it for you – and is accordingly liable in the event of losses.

Then you have to decide whether you want to invest in commodities for the long term, commodity mutual funds and ETFs are the most advantageous for a long-term investment.

If you are well versed in the risk involved in CFDs, this is another option. A simpler alternative if you want to invest in commodities could be commodity trading with certificates, which you can buy and sell through securities accounts.

Our recommended broker is Capixal – you can open an account here.

After you have clicked the link, enter your details and verify your email address.

Step 2: transfer money

After signing up, it is a good idea to consider how much money you want to invest in commodities. Once you have decided on an amount, pay the corresponding amount into your Capixal account. The deposit works at Capixal via:

Payment optionPossible?
Buy raw materials with a credit card.✔️
Buy raw materials with PayPal.✔️
Buy raw materials with Skrill.✔️
Buy raw materials with bank transfer.✔️
Buy raw materials with Neteller.✔️
Buy raw materials with UnionPay.✔️

The button for making a deposit can be found at the bottom left of your account (see screenshot).

Step 3: the purchase

After you have deposited your credit, look for ” raw materials ” in the bar above. You can then choose between different raw materials. In our example, we choose the raw material gold. This window then opens:

Here you choose how much money you want to buy raw materials for. You can also set whether you want to trade with or without leverage (with leverage if you want to trade, without if you want to hold on to for a longer period of time).

You can also use the Stop Loss and Take Profit values ​​to set whether your raw materials should be sold automatically if a certain value is exceeded or not reached.

And that was about it. If you click on the “ Open Trade ” button, your commodities are directly in your portfolio!

Raw material price fluctuations: This is how one assesses the raw material market

investing-in-raw-materials

Rising or falling raw material prices have a direct impact on economic activity and consumer prices. Consumers notice a rise in the oil price when they deliver heating oil or when they next fill up their car.

Rising energy prices can also have a negative impact on the shares of industrial companies because large companies have high energy consumption and thus sharply rising energy costs.

Consumers notice the economic development on the raw material markets through higher prices in the supermarket or at the petrol station.

Investors with a flair for commodities could also benefit from high energy prices.

Best raw materials in comparison: which raw materials should you invest in?

A wide variety of raw material assets are traded on the markets. Thanks to the financial industry, you, as a private investor, can invest in almost any commodity.

Before investing, it is essential to know which commodity you want to invest in.

Above all, precious and industrial metals, agricultural raw materials, and crude oil play essential roles in capital markets. In addition to gold and silver, precious metals are all metals that are corrosion-resistant. Platinum, palladium and rare earth are also traded on the global commodity markets.

The gold price is particularly interesting for private investors. Many are concerned with the question of whether it might be worthwhile to speculate on a rising gold price. Investors also have a keen interest in the development of industrial metals such as aluminum, lead, copper, nickel, zinc and tin.

Soft Commodities ” are agricultural commodities. This includes various types of grain, sugar and agricultural products such as coffee and cotton. The coffee trade should not be underestimated here: the global trade volume is greater here than with most other raw materials.

Renewable raw materials are renewable raw materials. This includes agricultural products such as wood, vegetable oils or sugar. That should be particularly interesting for those investors who want to invest sustainably.

Comparison of commodity indices and commodity prices

ETFFund size

in EUR million

TER

in %

Income

use

Replication

method

iShares Diversified Commodity Swap UCITS1,3190.19% paAccumulatingUnfunded swap
UBS ETF (IE) CMCI Composite SF UCITS ETF4630.34% paAccumulatingSwap based
L&G Longer Dated All Commodities UCITS ETF4520.30% paAccumulatingUnfunded swap
Lyxor Commodities Thomson Reuters / CoreCommodity CRB TR ETF4490.35% paAccumulatingUnfunded swap
iShares Diversified Commodity Swap UCITS ETF2760.46% paAccumulatingUnfunded swap
WisdomTree Enhanced Commodity UCITS ETF590.35% paAccumulatingUnfunded swap
L&G All Commodities UCITS490.15% paAccumulatingUnfunded swap
Market Access Rogers International Commodity UCITS ETF400.60% paAccumulatingUnfunded swap

Well-known are commodity indices such as the JP Morgan Commodity Curve Index family, JPMCCI for short, which tracks the development of entire commodity sectors. The S&P GSCI, in particular, is often used. The index contains 24 raw materials, the composition is adjusted annually according to the global production volume.

There is also the Thomson Reuters CRB Index, the Bloomberg Commodity Index and the Rogers International Commodity Index (RICI). All of these only list commodities that are tradable.

Global economic growth has the greatest impact on raw material prices. China and the USA, in particular, have a significant impact on the prices of important raw materials and, above all, on the prices of industrial raw materials. If the demand for energy sources or industrially required raw materials increases, then their prices also increase.

The production capacity plays a significant role in setting prices, as commodity producers can respond to possible changes in demand only with a time lag.

In the case of agricultural raw materials, for example, the supply cannot be increased at will at short notice. As an investor, you could benefit from changes in supply and demand when you invest in commodities.

In the case of agricultural commodities, weather phenomena must also be taken into account, as crop failures or long periods of drought can affect the global markets for agricultural commodities.

Table of Contents

Invest in commodities – the best commodity investments

1. Commodity stocks

If you prefer not to invest directly in commodities, you can instead buy stocks in companies that do business in commodities.

You need securities account with your house bank or an online broker to trade commodity stocks as with all stocks.

It is advisable to use a depot comparison to find the right depot.

We recommend our test winner broker Capixal, as it offers the best conditions for investing in raw materials. More on this in our fee comparison.

2. Trade commodities with CFD

If you want to profit from the performance of oil, gold, or corn, you can also buy commodities via CFDs. With a CFD, you as the investor participate directly in the development of the commodity price without owning it.

CFD trading, however, is very risky and complex, so a lot of know-how should be available here. A lower-risk investment is, therefore, more likely to be commodity stocks or commodities per certificate.

investing-in-raw-materials

3. Trade raw materials with a certificate

As a private investor, you can also invest in almost any commodity with certificates. There are certificates for silver, palladium and coffee, for example. Certificates have the advantage that you can buy and sell them through any securities account, just like stocks.

As an investor, you can conveniently trade a certificate between normal bank opening times. However, you should note that Certificates are bonds. The certificate is worthless if the bank should go bankrupt.

With certificates, however, investors have the opportunity to rely on the price development of raw materials at a low cost. You can also eliminate the currency risk of the dollar or get a guarantee on the money deposited. As an investor, you could also speculate on falling prices instead of just rising.

4. Commodity mutual funds

There are different types of commodity funds. Some of the funds reflect the different weightings of the commodity index. The price development relates to the previously selected raw materials. Other funds, on the other hand, are based on the active buying and selling of raw materials.

Other types of commodity funds only focus on a specific commodity, such as gold. In addition, a commodity mutual fund’s trading strategy can be active or passive.

A well-known fund is, for example, Optinova Metals and Materials, which indirectly invests in the commodity markets by means of commodity stocks on metals and agricultural commodities.

Even the RobecoSAM Smart Materials invests worldwide in companies providing technology, products or services relating to the extraction and efficient use of raw materials, the recycling of used resources and innovative alternative materials.

Commodity investment funds are generally more suitable as a long-term investment, as you as the investor usually have a front-end load of up to five percent. As an alternative to commodity funds, investors can invest in ETF commodities or ETCs (Exchange Traded Commodities).

5. Invest in commodities with ETFs

ETFs on commodities are also enjoying increasing popularity. ETFs have the advantage that they are cheaper than other investment options.

The exchange-traded funds follow the respective index and dispense with a fund manager.

Commodity ETFs track the price development of the commodities themselves, but above all, they depict the futures price. The current price for raw material is also called the spot price.

This is the price you would have to pay if you were to buy the chosen raw material. As an investor, of course, you don’t want to buy raw materials such as corn, wood or oil straight away.

That is why commodity ETFs trade with so-called futures, which are also known as futures contracts. Lots offer the ETF the opportunity to participate in the price development of a commodity without dealing with the numerous problems of actual delivery of goods.

A commodity ETF is therefore constantly busy buying long-term futures and selling them again shortly before the delivery date. With this mechanism, the ETF provider ensures the display of the performance of the commodity index, which is based on commodity futures.

How is the return on commodity ETFs calculated?

investing-in-raw-materials

The return of a commodity ETF is made up not only of price fluctuations in the spot price but also of the interest income held by the fund and the roll yield (profit or loss through rolling the futures).

The ” rollers ” refers to the replacement of short futures contracts by long-term contracts. An ETF generates a roll profit when the futures price for a commodity is below its spot price.

Before choosing a commodities ETF, it is important that you understand the underlying index. Commodity indices are very diverse compared to stock indices because there is no standardized mechanism such as market capitalization.

Therefore, each index is highly individual. Some indices weight their components according to the respective world production. Other. Indices weight the commodities according to their economic importance, liquidity and diversification potential.

Most indices set a minimum and maximum weighting for the individual commodity categories so that the indices are not too strongly dominated by energy commodities. So take enough time to understand the various index methods before choosing a commodity ETF.

Advantages and disadvantages of commodity investments
  • Real material value
  • Volatility favors the chance of higher profits
  • Increase in demand in developing countries
  • Commodity price develops independently of securities
  • No interest, dividends or other secondary income
  • It can be influenced by weather events (agricultural products)
  • Higher risk
  • Trading in certain products is ethically questionable (e.g. soy)

Fees when investing in commodities

We compare the fees of the largest brokers with the following example:

  • We buy gold worth € 1,000
  • We hold the gold for a month and sell it again
  • We assume that the course will not change in the 30 days

With these assumptions, we now compare the fees of Libertex, Capixal & Plus500 :

providersLibertexCapixalPlus500
Depositfor freefor free
Purchase fees€ 2.20€ 3.80
Holding feesfor free0.05%
Sales charges€ 2.20€ 3.80
Payoutfor free1.9%
Total fees€ 4.40€ 27.10

Investing in raw materials: the bottom line

investing-in-raw-materials

Rising and falling commodity prices can have a direct impact on consumer prices and economic activity. You can use these fluctuations to your advantage when you invest in commodities. As a private investor, you can include almost any commodity in your securities account.

The advantage of raw materials is that they are not directly dependent on the financial markets and can cushion fluctuations in the stock markets. Commodity investments also offer potential inflation protection, as commodity prices rise with inflation.

Disadvantages are that the commodity markets are partially opaque and difficult to assess, so commodity investments are more difficult for investment beginners.

In addition, raw materials do not generate any profits, which is why many investments are considered pure speculation. Therefore, before investing, you should also learn more about the ethical issues involved in investing in raw materials.

So before you invest money in raw materials, you should deal with the various options and in which raw material you want to invest, for example, in renewable raw materials or precious metals. Also, consider the price of gold and oil when considering an investment.

If you want to invest in raw materials, we advise you to do this with our test winner broker Capixal – this offers the best conditions for investing in raw materials.

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FAQs

Yes, because commodities are usually quoted in US dollars. As an investor in the eurozone, you must keep an eye on the price and currency risk.

Investing in precious metals, agricultural products, and others can be a useful addition to your portfolio, as these are particularly suitable in terms of diversification. However, it is recommended that commodities only make up a smaller total proportion of your portfolio Experts recommend an upper limit of around ten percent of total assets.

In principle, every investor can invest in commodities. However, experts recommend this asset class for experienced investors because commodity trading is complex due to its comparatively high volatility.

Yes, how willing you are as an investor to take risks should also be reflected in the choice of raw materials. Precious metals, in particular, are often suitable for reducing the risk of your entire portfolio because the gold price in particular often moves in the opposite direction to the price development on the stock market.

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