Invest in commodities and commodity funds

Commodities are basic raw materials ranging from agricultural goods like wheat and cattle to energy sources such as oil and natural gas, as well as metals like gold, silver, and aluminium. They also include perishable "soft" commodities such as sugar, cotton, cocoa, and coffee. Historically, commodity trading has evolved from simple local trading to the sophisticated global markets of today, where futures and options are traded on exchanges worldwide. These markets allow producers to manage price risks by selling future production at agreed prices. Since the 1990s, commodities have become a distinct asset class, with the creation of futures indices and various investment options like mutual funds and exchange-traded funds, providing diverse ways to invest across different commodities and sectors.
The three categories of commodities are:

• Soft commodities (softs) include grown commodities, such as coffee, cocoa, sugar, corn, wheat, and soybeans.
• Hard commodities, such as gold, silver, copper, and lithium, are commodities extracted from the ground.
• Energy commodities, including electricity, gas, coal, and oil, are directly related to generating energy.
  

Why invest in commodities?

Commodities offer a unique investment opportunity for those looking to diversify their portfolio and seek protection against inflation. Investing in commodities can include everything from energy sources such as oil and natural gas to industrial metals like copper and aluminium, as well as precious metals such as gold and silver. These goods are critical components in many aspects of modern industry, technology, and manufacturing, which means they can have a direct connection to global economic development and technological advancements.

By including commodities in an investment portfolio, investors can benefit from price increases during periods of economic growth and heightened demand for these fundamental materials.

Experts usually recommend that around 4-15 % of the portfolio consist of gold to ensure a diversified portfolio. Depending on the investors' risk profile and the current market condition, the portfolio allocation towards commodities can be adjusted to a higher or lower level.

How much precious metals a portfolio should contain depends on the investment strategy and market scenario. According to Oxford Economics, a portfolio containing 5% gold is optimal in a 50-year market scenario with 2.25% annual growth and 2% inflation. If the growth or inflation is higher, the allocation towards gold should also increase.
The share of commodities in a portfolio is determined by the investor's risk profile, time horizon, and prevailing market climate.

At a time when, for example, both shares and bonds have low return potential, it can be interesting to increase one's commodity exposure and vice versa. Several successful investors and portfolio models advocate that up to 40 % of a portfolio's exposure should be allocated to commodities, e.g., Ray Dalio's all-weather portfolio and the dragon portfolio.

Do thorough research to find the best commodity fund for your investment strategy, and remember that historical returns are no guarantee of future returns.

What yield can be expected from commodities?

Commodities can be volatile, and high volatility, therefore, means a large upside and downside. High volatility in a rising market can generate high returns, and vice versa. The return distribution of commodities shows a positively skewed distribution, indicating a tendency for commodities to perform extremely well at certain times. Returns on commodities are strongest when inflation unexpectedly rises ー which usually coincides with falling stocks and bonds.

Investing in commodities protects the portfolio against inflation and provides a higher risk-adjusted return.

• AuAg Funds offers commodity funds that focus on providing exposure to precious metals and elements used in electrification. Commonly, these assets offer protection against monetary inflation and are essential in the transition to a electrified world – trends that are highly relevant today.
• AuAg's funds fit well into a portfolio of traditional assets as they have low correlation with stocks and bonds.
• AuAg Funds offers both daily traded and exchange-traded funds. Common to these is their focus on companies that extract gold and other precious metals.