Oct 26, 2023 By Triston Martin
Inflation is when prices keep going up over time. This makes cashless valuable because it can't buy as much. As inflation makes money less valuable, investors may look for ways to protect their portfolios from inflation's harmful effects. One way to deal with inflation is to invest in commodities, tangible assets that can keep their value. Commodities are raw materials or primary agricultural products that can be bought and sold on commodity exchanges. They include precious metals, energy, farm goods, and metals used in industry. These assets have value on their own, and because their prices tend to go up when inflation is high, they can be used as a hedge against inflation. Investing in precious metals like gold and silver could be a way to trade commodities and protect yourself from inflation. In the past, these metals have been used as a way to save money during times of economic instability and price increases.
Precious metals are rare and valuable metals with a high economic value because they are beautiful and can be used in industry. Gold and silver are the most commonly traded precious metals. Platinum and palladium come in second and third.
Historically, precious metals have been considered a haven investment during economic uncertainty and inflation. This is because they tend to maintain their value even when other assets, such as stocks and bonds, are losing weight. For example, during the inflationary period of the 1970s, the price of gold increased by over 1,800%.
The price of precious metals is impacted by several factors, including:
Investing in precious metals has several ways, including physical ownership, ETFs, and mining stocks.
Investors can buy physical gold or silver in the form of coins or bullion. This method allows investors to directly own the metal, which can be stored at home or in a secure location. However, there are storage and insurance costs associated with this method.
Exchange-traded funds (ETFs) are a popular way to invest in precious metals. These funds hold physical gold or silver, allowing investors to trade them on the stock exchange. ETFs expose investors to the underlying commodity without needing physical ownership or storage costs.
Investors can also invest in mining stocks, which are shares of companies that extract and sell precious metals. This method exposes investors to the commodity and the potential for capital gains from the mining company's performance.
Investing in precious metals is not without risks. Some of the risks associated with investing in precious metals include the following:
Agricultural commodities are raw materials produced by farmers, including crops such as wheat, corn, soybeans, cotton, and livestock such as cattle and hogs.
Agricultural commodities have historically performed well during inflationary periods. This is because rising prices can increase demand for these commodities, increasing prices even further. For example, during the inflationary period of the 1970s, the cost of wheat increased by over 700%.
The price of agricultural commodities is impacted by several factors, including:
Futures contracts are agreements to buy or sell a specific quantity of a commodity at a future date and price. Futures contracts are a popular way to invest in agricultural commodities as they provide direct exposure to the item.
ETFs that track agricultural commodities are another way to invest in this asset class. These funds hold a portfolio of farm commodities and allow investors to trade them on the stock exchange.
Investors can also invest in agriculture-related stocks like seed companies, fertilizer manufacturers, and equipment suppliers. These stocks provide exposure to the agricultural sector and can offer diversification benefits to a portfolio.
Investing in commodities is a popular way to hedge against inflation, as their prices tend to rise during periods of inflation. Precious metals, agricultural commodities, and energy commodities are popular commodities to invest in. However, investing in commodities is not without risks, and investors should carefully consider their investment objectives and risk tolerance before investing in this asset class. Additionally, investors should seek the advice of a financial advisor before making any investment decisions.
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