Introduction to Commodities Investing

Module 1. The Power of Understanding Commodities

Learning Objectives:

1. Define the fundamental elements of commodities.

2. Understand how a deeper knowledge of commodities can improve your decision-making and help you to be a generally more intelligent investor.

• Bonus Material: Global Commodity Snapshot

Commodities are raw materials or primary agricultural products used in commerce. They are traded through a variety of means, including spot and futures markets. They are typically fungible, which means they are interchangeable with other commodities of the same type. For example, one troy ounce of pure gold from the USA is the same as one troy ounce of pure gold from Australia.

Commodities play an important role in our daily lives. Every time you walk into a supermarket or the mall, you are surrounded by commodities that are traded around the world. Examples include the cotton in your clothing, the metals in your electronics, the food you eat, and the fuel in your car.

There are four broad categories of commodities:

1. Agriculture: Grown and harvested for food, drink, or raw materials (E.g. cocoa, coffee, corn, cotton, soybeans, sugar, wheat)

2. Livestock: Animals raised for meat or other products (E.g. feeder cattle, live cattle, lean hogs)

3. Metals: Extracted from the earth, used in industry or finance (E.g. gold, silver, platinum, copper)

4. Energy: Fuels used to generate power or heat (E.g. crude oil, heating oil, natural gas)

The relatively obscure and perhaps intimidating asset class of commodities is often ignored by investors, especially retail investors. However, it is both fascinating and important to understand how this market works. Even if you don’t invest in commodities directly, understanding how this market works can significantly improve your overall investment insight.

A company’s profitability—and therefore its stock price—can be heavily influenced by the cost of raw materials. This applies across sectors: food manufacturers depend on agricultural inputs, automakers on industrial metals, and so on.

Understanding the supply and demand dynamics of relevant commodities can help you learn more about the future prospects of a business. Mining companies, for instance, typically benefit greatly when the market price of the mineral they are extracting increases. Additionally, many major currencies are closely linked to the performance of commodities critical to their national economies.

Commodities provide you with a whole new asset class to consider when looking to protect and grow your wealth. And a deeper understanding of this market will enhance your ability to identify investing opportunities and threats across a number of asset classes.

The availability and cost of crude oil influences the lives of billions of people. A simple example can illustrate this point: A reduction in the world supply of oil may increase fuel prices. This could increase the price of retail goods, as elements in the supply chain become more expensive. All else equal, inflation increases and the buying power of consumers’ money decreases. This is one of the reasons why politicians sometimes put pressure on OPEC to increase its production of crude oil. Understanding this dynamic helps investors anticipate inflationary trends, the impact on different industries, and potential responses from central banks.

Besides the practical advantages of understanding the commodities market, a great level of satisfaction can be found in acquiring a better understanding of how the world functions. International news becomes more relevant, and you begin to better understand the rationale behind decisions made by leaders and politicians. A well-functioning international commodities market—characterised by price transparency, efficient logistics, and minimal political disruption—is vital to the survival of many economies around the world.

Take Action

Trying to focus on too many commodities at once is unnecessary and can feel overwhelming.

1. Look through Module 1.1. Global Commodity Snapshot and see if any of the commodities listed there pique your interest. Choose one commodity to focus on.

2. Once you’ve chosen a single commodity to focus on, begin your learning journey:

   1. Read articles, blogs, and reports by industry experts.

   2. Listen to interviews and podcasts from professional traders or analysts.

   3. Review supply/demand trends and geopolitical developments.

Stay humble, stay curious, and enjoy the process. The world’s most successful investors are learning machines.