Commodities: An Overview
Precious metals, agricultural products and every raw material that is used either for consumption or production in Australia can be classified as commodities. The process of commodity buying involves either the physical trading of these goods or using commodity futures to buy them or sell them at a certain price after an agreed period. Futures contracts are the most common way traders use to buy commodities in the country.
- Commodities are broadly classified as either hard or soft, hard commodities being the ones that require drilling, mining or other extraction processes to obtain and soft commodities being the ones that are cultivated or ranched. Commodities can be further divided into three main types:
- Energy: Oil, gas, coal and any other physical good that can be sold commercially to generate power. Electricity also comes under this category and even renewable energy sources like wind power and solar energy sectors.
- Agricultural: Consumable goods that are obtained through the means of farming, cultivation and harvesting. This includes cattle and other livestock, fruits, vegetables, cereals and grains. Other non-edible products such as coconut oil, cotton and even rubber can be classified as agricultural commodities.
- Metals: Precious metals like silver and gold are metal commodities that are sure to stand the test of time. Common ones like copper can also be termed as metal commodities but they’re not as valuable.
Environmental commodities are not a general classification as they are relatively new and are non-physical credits. Its value is based on the demand for clean energy. The same goes for cryptocurrencies too as virtual commodities. The reason both of them are not as popular in terms of commodities is due to the absence of tangible physical goods backing them up.
Four Different Ways Of Buying and Investing in Australian Commodities
- Direct Investment: Physically purchasing a commodity is the most straightforward way of commodity buying. Usually, there’s no third party or a negotiator involved and the only thing that buyers need to look into is the storage and logistics. The larger the number of commodities bought, the more the issue of storage becomes a problem. This is especially true in the case of perishable items like agricultural commodities. Due to the issues of storage, most individual investors stay away from directly buying physical commodities.
- Futures Contracts: One of the most common commodities investing methods in Australia. However, this too is not suitable for individual investors but rather large corporations that have loads of capital. Individuals who want to buy futures contracts are expected to have a brokerage account with substantial capital in them.
- Commodity Stocks: Individual traders can opt to buy companies that produce, harvest or mine commodities. They can buy shares of energy industries for hard commodities or buy the shares of an industry dealing with dairy products for agricultural commodities.
- ETFs and Mutual Funds: These two financial instruments are for those who don’t want to deal with commodities directly. There are a lot of investment funds in Australia that deal with physical commodities, company stocks or even futures contracts.
Commodity trading offers a lot of benefits for individual traders. They can help protect against inflation owing to the rising prices of commodities even when stock prices fall. Commodities can also act as the perfect hedge against major geopolitical events or disasters. Moreover, commodities provide a high degree of leverage and are also a great way for rookie investors to diversify their portfolios.