All that Shines is not Gold! — Investing in Oil and Precious Metals
By Rukmini Ravishankar
Ever wondered why jewelry stores are almost always packed? Of course, everyone likes that which makes them shine! The fact of the matter is, no matter what your purpose of buying gold is, it is an investment.
So, what sets it apart from other investments? 🤨
First of all, gold is tangible. It is not feasible to store millions of dollars in a locker at home because that will raise tax enquiries. On the other hand, tangible money can be a relief in times of financial instability.
So, investing in precious metals like gold is a good way to ensure that you have money on hand without attracting any worries of income tax.
As for oil, its rates have been appreciating. Crude oil is a fossil fuel — it is a source of energy from the decomposition of buried organisms, a process that takes millions of years for nature to replenish. But humans have been extracting them at a dangerous rate.
Studies show that the amount of oil we have will only last another 190 years, so they’re obviously highly valued. This can make you think it’s a good idea to invest in oil for the guarantee of returns. This isn’t necessarily true.
With more consumers moving towards sustainable alternatives like compressed natural gas (CNG) everyday, the demand for petroleum is slowly reducing. A Wood Mackenzie article predicts that petroleum demand could stall by as early as 2030. As of now, it is still a viable option for many investors out there.
Precious metals and oil are also commodities — tradable goods whose quality remains more or less consistent across different producers. This characteristic is called fungibility.
Gold is fungible because no matter who produces it, it is the same. Things like jeans, furniture, etc. don’t come under commodities because they change across producers.
How do you invest in commodities? 🤔
Here are some tools for you:
- Commodity Exchange Traded Funds 📦
An Exchange Traded Fund (ETF) is a basket of different securities that you can trade on the stock exchange. Commodity ETFs specialise in commodities like agricultural produce, precious metals, oil, natural gas, etc.
Say, you don’t really want anything to do with precious metals directly and just want to make money off of its volatility; then commodity ETFs are for you. It helps you track the changing prices of commodities without having to interact with the actual product at all.
2. Futures 🔭
A futures contract is a legal agreement to buy or sell a particular commodity or asset at a pre-agreed price and time in the future. Let’s take an example.
A street food vendor makes a constant profit as long as onions are priced at $2/pound. When the price increases, he or she loses money. When it drops, the vendor sees his or her profit. The vendor may want to avoid this risk of volatility. So, the vendor enters a futures contract with an investor.
This investor fixes a specific rate with the vendor, say $2. If the price of onions this month now increases to $3, the investor is contractually obligated to pay the difference of $1. If the price drops next month to $1, the vendor still pays $2 per pound and the investor pockets the extra dollar!
A futures contract can be made for any commodity. It has two participants: the hedger, who wants to avoid market volatility; and the speculator, who speculates the prices of the commodity and makes profits out of price changes.
3. Direct Investments 📥
The simplest way to invest in a commodity is to buy it. This is mostly applicable to precious metals. You as a commodities investor may buy gold and platinum jewelry and never wear it — then, your real interest lies in securing assets in the form of these precious metals, not in using them.
4. Stocks in Companies that Produce them 👩🏭
Another way you can invest in commodities is by buying stocks or shares in companies that manufacture or process these commodities. If you own a share in a petroleum company, you have zero interaction with the commodity itself, but you’re making money off of its volatility.
To wrap up, commodities are volatile — they are subject to sudden falls and jumps in value. So, it is only better for you to be sure to be aware of your risks before dipping a toe. In the end, your investments could leave you wealthier than ever, or you could be completely helpless with a house filled with gold bricks and buckets full of petrol! *Did you just imagine that? Lol!*
This article is part of the bite-size bundle ‘Commodities & Investing’ on the Finllect app. Find the Finllect app on Appstore today! 💁
