For many investors, commodities are popular alternative investments because they provide an excellent hedge against inflation. While commodities prices can be volatile because they are sensitive to everything from weather events to political turmoil, their price is uniquely tied to inflation, so they can help your portfolio remain above water during periods of extremely high rates. Furthermore, commodities provide diversification beyond their ability to hedge inflation since the economic pressures determining their price are often very different from the rest of the market.
Still, if you want to invest in commodities, you will need to know which is best for your portfolio. Some commodities to consider include:
- Precious metals
Gold, silver, and other precious metals generally have high prices even during periods of high inflation. During particularly weak economies, precious metals can be used as an alternative to fiat currency. This is where the term gold standard comes from, giving an idea of how important this investment can be during economic crises.
Throughout 2022, the price of gold has increased despite the high inflationary environment across the globe. If you want to invest in precious metals but not purchase bullion, you can consider ETFs that invest in this commodity. Some of these ETFs even allow you to exchange your shares for physical assets should you change your mind down the line. If you do choose to invest in precious metals, remember that prices can fluctuate wildly, so do not get nervous and liquidate when there is a sudden downturn; the price will turn around quickly.
- Industrial metals
You can invest in more than just precious metals. Some industrial metals like copper and aluminum can be great investments. Experts predict that the price of copper will double in the next five or so years because of growing demand in the construction and production industries. Copper is used in electric vehicles, solar power and electric grids, cookware, and many other goods. Along the same lines, lithium is expected to make major gains in the coming years because of its use in electric vehicle batteries. Countries around the world are pushing for greener transportation, so the demand for these batteries will likely only continue to increase. Some people think that lithium may end up being a better investment than gold considering its growth potential.
- Fine wine
Fine wine has emerged as a major commodity for investors, especially those trying to hedge against inflation. This class has consistently outperformed the consumer price index. When inflation hit 7 percent in 2021, the growth in the wine industry was more than 12 percent. For investors, fine wine is the perfect investment in that it only becomes more valuable with age and is driven by limited availability. Most of these wines have limited production runs and can be difficult to find on the secondary market. Because these wines are so rare, collectors will pay very high prices to get their hands on the right bottle. Moreover, you do not have to be an expert in fine wine to figure out which ones will be most valuable to collectors. Rather, you can turn to wine investment firms to handle these decisions for you.
- Real estate
You may not think of real estate as a commodity, but it falls under this umbrella. As a general rule of thumb, real estate increases in value with inflation. Real estate is a flexible investment that provides a steady income. You can adjust rent prices according to inflation to ensure that you get a fair return for the current market. Moreover, you should consider both residential and commercial properties as they are affected by different economic factors. Holding both provides some diversification within the real estate asset class. If you do not want to invest in properties themselves, especially considering the high cost of management, then you can always opt for a real estate investment trust, which issues shares that trade like a stock. These shares are a liquid investment with built-in diversification.
Energy demand will only continue to increase as the population expands. Around the world, there has been a push toward greener options than fossil fuels, but demand for natural gas and oil remains very high. In fact, demand has not really decreased at all even as green energy has become more available. Heavy industry remains very dependent on fossil fuels, and it going green likely won’t happen for a long time.
That said, global investment in the oil and gas industry has declined since 2014, so this may not be the best choice if you’re looking for a long-term investment. However, with the right approach to this asset class, you can make a considerable return while protecting your portfolio against inflation. You should also appreciate the riskiness of this class in terms of production issues and potential disasters that can be a public relations nightmare.