Understanding Commodities and Their Role in Investment Portfolios
Last Updated September 2023
- Understanding Gold as a Commodity
- Navigating Commodity Investments in the UK
Investing can often seem like a complicated endeavour with a multitude of options and pathways available. From stocks and shares to property and cryptocurrency, the choices can seem endless. However, one investment option that has proven to be a key pillar of balanced investment portfolios throughout history is commodities.
A commodity, in simple terms, refers to a basic good used in commerce and trade that is interchangeable with other goods of the same type. They are most often used as inputs in the production of other goods or services in the form of raw materials. Traditionally, commodities include things like oil, natural gas and agricultural products. However, precious metals are often said to be a commodity that holds a unique position, with the most notable and well-recognised being gold.
Gold has been used as a store of value and a form of currency for thousands of years. It is said to hold an intrinsic value that is recognised and accepted throughout the world. Its unique properties make it valuable for many industrial uses, and its rarity and physical appeal have led to its ongoing demand in jewellery, collectables and investment. Because of the balance of practical utility and subjective value, gold could be a compelling option for investors looking to diversify their portfolios.
The Royal Mint, one of the world’s leading and most established organisations, offers individuals the opportunity to invest in gold and other precious metals through a range of physical and digital products. In this article, we’ll take a deeper look at the role commodities, specifically gold, can play in your investment strategy and how they contribute to diversification.
Whilst the purpose of this article is to provide information and guidance, not advice, potential investors should always conduct their own research or seek professional advice when considering such options.
Understanding Gold as a Commodity
In the world of investment, gold is often referred to as a commodity. But what exactly does this mean, and why is it important for those considering an investment in gold?
In basic terms, commodities can generally be divided into two main types: hard and soft commodities. Soft commodities are typically agricultural products or raw materials, like wheat or cotton, whilst hard commodities are natural resources that must be mined or extracted, such as oil, natural gas and precious metals like gold.
Gold is a hard commodity and has a rich history as a prized asset. For centuries, societies have cherished gold for its rarity and its unique properties. Today, gold is not only used in jewellery and industry but also held by individuals and central banks as a form of investment.
Investing in gold can take several forms. Physical gold, such as gold coins or bullion, are tangible assets that you can hold in your hand. But owning physical gold can come with challenges such as storage and insurance costs. Another way is through financial products that track the price of gold, such as exchange-traded funds (ETFs), or digital platforms like DigiGold from The Royal Mint.
Navigating Commodity Investments in the UK
For investors in the UK seeking to explore the world of commodities, there are several avenues to consider. Understanding these options and partnering with reputable investment companies are vital aspects of successful commodity investments.
One way to invest in commodities is through physical gold. The Royal Mint, renowned for its history of minting coins, offers a range of precious metal products suitable for investors and collectors. Its selection includes gold bars and coins, such as the iconic Britannia and Sovereign ranges, which can be purchased directly from The Royal Mint’s website.
Additionally, The Royal Mint offers a physically backed digital gold product called DigiGold, which provides a modern and convenient way to buy, store and sell gold. With a minimum order value of £25, DigiGold allows investors to participate in the gold market without the need for physical storage or handling. This digital gold product offers the flexibility to invest in gold in smaller denominations, making it accessible to a broader range of investors.
ETFs offer another convenient and accessible way to invest in commodities like gold without owning the physical metal. Gold ETFs are traded on major stock exchanges and aim to track the price of gold by holding gold bullion or derivatives contracts. Investors can buy and sell shares of these ETFs through their share dealing accounts, providing liquidity and flexibility.
Investing in gold mining stocks offers indirect exposure to the commodity whilst providing potential leverage to gold price movements. These companies are involved in the exploration, development and production of gold, and their stock prices often correlate with the price of gold. However, they also carry additional risks related to the individual company’s performance and operational factors.
When selecting investment companies to facilitate commodity investments, consider factors such as reputation, track record, regulation and compliance, fees and charges, investment philosophy, customer support, and transparency. A reputable investment company can provide valuable guidance and enhance your commodity investment journey.
Understanding the various ways to invest in commodities is essential for those aiming to diversify their investment portfolio. Whilst commodity investments can offer unique opportunities, it is crucial to carefully assess your financial goals and risk tolerance, and consult with a qualified financial advisor to tailor a well-balanced and resilient investment strategy that aligns with your aspirations for a prosperous financial future.
The contents of this article, accurate at the time of publishing, are for general information purposes only, and do not constitute investment, pensions, legal, tax, or any other advice. Before making any investment or financial decision, you may wish to seek advice from your financial, pensions, legal, tax and/or accounting advisors.