Education • 3 min read
By Sophia Cosby
What do coffee, cocoa, corn, cattle and cotton (say that five times fast) have in common? They’re all part of an asset class called commodities, which is dominating the news right now. But according to financial experts, commodities are more than just a trend: they’re considered to be evergreen assets that can round out and fortify any investment portfolio. So what makes them so popular? Here are the three key reasons why they’ll always be in style.
Picture this: You’re in the supermarket and you pick up a box of your favourite cereal and notice that it’s become more expensive. This is because the price of the raw materials that are used to produce these products, like grains or sugar, has gone up. At the same time, the value of currency has decreased, meaning that one euro or one insert-your-local-currency-here can no longer buy you as much as it used to.
This is called inflation and, although it occurs naturally in any economy when the supply and demand of things gets a bit unbalanced, it’s still disconcerting.
Commodities are considered to be a good protection, or hedge, against the negative effects of inflation. Contrary to other asset types, the value of commodities actually tends to increase during inflationary periods. As the demand for commodities increases during inflation, so does their value. That’s why people who have invested in commodities can potentially make money even though the overall value of currency has dropped.
Speaking of agricultural goods, you’ve most likely heard the saying “don’t put all your eggs in one basket.” It’s a commonly used phrase in the investment world when talking about one of the golden rules of investing: diversification.
Diversifying your portfolio means reducing your risk by spreading your investments across many different asset types. As we’ve learned, the performance of commodities has a low to negative correlation with the performance of stocks, fiat currencies and cryptocurrencies. In the example of inflation, this means that your commodities investments will likely be unaffected even if the value of fiat currencies takes a nosedive. Adding commodities to your portfolio can therefore be a smart way to diversify.
Although there is an inherent risk involved in commodities investments, there is still a strong and inherent global demand for raw materials like crude oil, soybeans, corn, sugar, livestock and more - so much so that when the production of these commodities can’t meet the increased demand (like during the pandemic or because of the war in Ukraine), the market turns to alternatives. As an example: Ukraine is the world’s largest producer of sunflower oil, but hasn’t been able to export its supply and meet the regular demand due to the Russian invasion. As a result, other vegetable oils like rapeseed oil have seen a surge in demand to fill the gap and to allay fears of future supply issues.
This unwavering demand positively impacts the stocks of companies that deal with commodities, which in turn is good news for people who are invested in these companies and who will likely see a positive return on their investments.
Commodities have you convinced? You can now invest in 30 commodities* on Bitpanda starting from as little as €1. As always, you can buy, sell or swap your assets whenever you want, even outside trading hours.
If you’re not quite ready yet, why not read more about commodities and ETCs on the Bitpanda Academy.
*Commodities are the underlying Exchange Traded Commodities of the contracts offered as Bitpanda Commodities and are brought to you by Bitpanda Financial Services GmbH. More information about the product and the PRIIPs KIDs are available at bitpanda.com. Investing carries risks up to a total loss of the invested capital. Make sure to conduct your own research before making any investment.
* Index Certificates (e.g for commodities), Stocks and ETFs are underlying assets of the contracts offered as Bitpanda Stocks, brought to you by Bitpanda Financial Services. More information at bitpanda.com.
This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Bitpanda’s Response to the War in UkraineRead more
Bitpanda GmbH ve grup şirketleri (Bitpanda) Türk Parasının Kıymetini’nin Korunması Hakkında 32 sayılı Karar’ın 2/b maddesine göre Türkiye’de yerleşik sayılan hiçbir kişiye yönelik olarak 6362 sayılı Sermaye Piyasası Kanunu başta olmak üzere Türkiye Cumhuriyeti Devleti mevzuatı hükümleri gereği Türkiye’de faaliyet izni gerektiren hiçbir sermaye piyasası faaliyetine dair hizmet sunmamaktadır. Şayet Bitpanda’nın yabancı sermaye piyasalarında vermiş olduğu hizmetlerden Türkiye’de yerleşik kişilerin faydalandığı tespit edilecek olursa tüm zararları kullanıcıya ait olmak üzere bu hizmetler ivedilikle sona erdirilecektir.
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