How to Invest in Commodities

Discover how to invest in commodities.

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How to Invest in Commodities

Investors have various options for accessing commodities.

Physical Ownership

Investors mainly own physical commodities like precious metals like gold and silver. These metals are valued for their tangible nature and are often purchased as bullion bars with standard size and purity. However, owning physical commodities can be challenging due to storage, insurance, and liquidity concerns. Other commodities, like agricultural products or metals, also pose storage issues because they deteriorate over time and must be sold within a specific period. That’s why many investors prefer not to own physical commodities directly. To trade physical commodities, you must find a trustworthy dealer and likely a storage facility for your holdings.

Futures Contracts

Futures contracts are agreements to buy or sell a certain amount of a commodity at a set price and date. Investors often use leveraged margin accounts to increase their trading size. Most contracts are settled in cash, which means investors don’t need to handle the commodities physically. However, trading futures requires additional paperwork and higher account minimums, and the margin needed can vary based on the contract’s value.

Individual Securities

With a regular brokerage account, you can invest in individual stocks of companies involved in commodity processing or production. These companies are usually in the basic materials or energy sectors. Investors interested in commodity exposure through stocks need to understand the specific industry. For example, mining and energy extraction companies often conduct feasibility studies on their reserves, which can affect their stock value. Larger companies with operations worldwide may be less affected by the results of a single study than smaller companies.

Mutual Funds, exchange-traded funds (ETFs), and Exchange-Traded Notes (ETNs)

Products like commodity-based mutual funds, ETFs, and exchange-traded notes offer exposure to commodities on exchanges. These products combine investors’ funds into a commodity pool and invest in commodities through different methods outlined by the fund. This could include buying futures, options, shares in related companies, or storing physical goods. Some funds are leveraged, aiming to provide double or triple the commodity price movement, so it’s crucial to read fund disclosures before investing to match your needs.

Alternative Investments

Commodities, like real estate, are considered alternative investments because they don’t trade like stocks and bonds. However, within precious metals, some items are more like collectibles than traditional investments. Bullion coins and jewelry, for example, have aesthetic and historical value, often trading at a premium compared to the actual metal value. While they can appreciate, their prices are less tied to market prices. You can buy jewelry from stores or coins directly from the Mint or dealers, but they’re seen more as collectibles than investments in commodities.

Compare Top Investment Platforms

Platform	Type	Account Minimum	Fees
Merrill Edge	Online Broker	$0	$0.00 per stock trade. Options trade $0 per leg plus $0.65 per contract
E*TRADE	Online Broker	$0	No commission for stock/ETF trades. Depending on trading volume, options are $0.50-$0.65 per contract.
Betterment	Robo-Advisor	$0%10 to start investing	0.25% (annual) for investing plan or a $4/month fee for balances under 20K, 0.40% (annual) for the premium plan
Wealthfront	Robo-Advisor	$500 for investment accounts, $1 for cash accounts, $0 for financial planning	0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
Empower	Robo-Advisor	$100,00	0.49% to 0.89%

What Do You Need to Open a Commodities Investing Account?

Opening a commodities investing account is similar to opening a regular brokerage account. If you want to invest in commodities through companies and funds, you can use a regular brokerage account because these investment types don’t require anything special. But if you plan to trade futures and options, check if your broker offers these options. You’ll also need to make some extra disclosures to show you understand the risks and have enough money so you won’t lose it all in one trade.

What You Need to Open a Brokerage Account

To start a brokerage account, you must share personal and financial details and answer simple questions.

Personal Information

The required personal and financial details include:

• Your name, address, and phone number.
• Your tax identification number is often your Social Security number.

• Date of birth and government-issued identification.

• Banking details are needed to deposit funds into the account.

• Investment knowledge and comfort with taking risks (known as “know your client” questions).

With online brokerages, you create an account with a username and password. Then, you’ll need to provide more information during the account setup.

Minimum Deposits

While some brokerage accounts don’t have a minimum balance requirement, activating futures trading in a margin account usually needs a few thousand dollars to be kept with the broker. The amount needed to trade will depend on the contracts you want to trade, which may exceed the account’s minimum deposit. The initial and maintenance margins for futures accounts could vary based on the account type, such as individual retirement accounts versus non-IRA accounts.

What You Need to Open a Gold IRA

Gold individual retirement accounts (gold IRAs) are a type of retirement investment involving commodities. Unlike a typical IRA, you must find a custodian to store the physical assets. To set up a gold IRA, you create a self-directed IRA, choose a custodian to manage the account, select an approved depository to store the gold, and pick a broker/dealer to purchase the gold. Some gold IRA providers offer these services as part of their offerings or can connect clients with providers in their network.

Personal Information

The documents and information needed are similar to those for regular investment accounts:

• Name, address, and phone number

• Tax ID number (usually your Social Security number)

• Date of birth and government-issued identification

• Additional KYC questions 

Minimum Deposits

Starting a Gold IRA (Individual Retirement Account) requires a certain amount. This is because gold is valuable, with even small amounts costing hundreds of dollars. The IRS has rules about the types of gold that can be used in a Gold IRA, but they don’t set a specific minimum deposit. However, many Gold IRA providers suggest starting with at least $2000. Some providers have higher minimums, ranging from $10,000 to $60,000. It’s essential to understand these minimums before opening a Gold IRA.

Best Gold and Silver IRAs

Company	Best For	Other Metals	Website Features
Augusta Precious Metals	Transparent Pricing	Silver	Educational resources, live chat, spot price charts
Noble Gold	Smaller Investors	Palladium, Platinum, Silver	Educational Resources
Goldco Precious Metals	Customer Support	Silver	Educational Resources, Live Chat, Spot Price Charts
Advantage Gold	First-Time Buyers	Palladium, Platinum, Silver	Educational Resources, Asset Comparison Calculator
Patriot Gold Group	Variety of Metals	Palladium, Platinum, Silver	Educational Resources, Live Chat, Spot Price Charts

Pros and Cons of Commodity Investing

Starting a Gold IRA (Individual Retirement Account) requires a certain amount. This is because gold is valuable, with even small amounts costing hundreds of dollars. The IRS has rules about the types of gold that can be used in a Gold IRA, but they don’t set a specific minimum deposit. However, many Gold IRA providers suggest starting with at least $2000. Some providers have higher minimums, ranging from $10,000 to $60,000. It’s essential to understand these minimums before opening a Gold IRA.

Pros

Investors like commodity investing because it helps protect against inflation, spread out risks in their investment collection, and could lead to big profits.

• Inflation hedge: Inflation usually happens when prices increase for things like gold or oil. People pay attention to these prices because they can show if inflation is going up or down. Sometimes, specific things happening in the market, like a big crop, can affect how much commodity prices increase. But usually, they move in line with inflation. This can help balance out how inflation affects other stuff investors have put their money into.

• Diversification: Commodities, like gold or oil, can help diversify your investments even when inflation isn’t rising. They don’t always follow the same patterns as stocks or bonds. Instead, their prices are mainly affected by how much of them are available and how much people want them, not by things like how many people have jobs or what the government does with money. This makes them unique and useful for spreading out your investments.

• Potential for large returns: Commodities like oil, gold, and crops can have prices that go up and down a lot. This happens because their production follows cycles. Events around the world that affect how things are made and moved, like big storms or new technologies, can also change prices. These big price changes offer chances for investors to make money, which is why they’re interested in investing in commodities.

Cons

Commodity investing has some drawbacks. You might not earn regular income from it, and the prices can go up and down a lot, which means it’s risky. Also, outside factors like natural disasters or political events can affect your investment.

• Lack of income: When you invest in commodities like gold or oil, you don’t get regular income like you would from bonds or stocks that pay dividends. Instead, your profit depends on guessing the right time to buy and sell when prices increase or decrease.
• High volatility: Commodity prices can change significantly because of big events worldwide. For example, wheat prices increased when Russia invaded Ukraine in 2022. This affected how people traded wheat in the future, and similar things happened with oil and gas prices because Russia was a major supplier.
• External risks: Investing in commodities like gold or oil comes with risks that investors can’t control. Conflicts in certain areas can disrupt the supply of goods, while bad weather can affect production. There are also risks related to regulations and politics that can slow down the flow of goods. These risks are why prices can change a lot, but they also offer the chance for big profits.

Factors to Consider When Opening an Investment Account

Not all brokers let you invest in commodities like gold or oil. Some online investment managers stick to ETFs and stocks only. But bigger brokers and platforms focused on trading usually offer futures trading, where you can invest in commodities. Examples include Schwab, Interactive Brokers, and E*TRADE, as well as specialized platforms like NinjaTrader and TradeStation. Here are the key things to consider when picking a broker for commodities trading.

Customer Support

Different brokers provide different levels of customer support. Most brokers offer help through phone and email. Some also have chat features and social media for customers to connect with them. However, some brokers offer support mainly through FAQs and email forms. Choosing a broker that offers support in the way you prefer is important.

Fees

Stocks and ETF trading fees have become very competitive, with many brokers not charging any fees. However, for futures trading, fees are calculated per contract and can range from a few cents to a few dollars. While it’s tempting to choose a broker with the lowest fees for futures trading, it’s also important to consider the overall quality of the trading platform.

Available Assets

Many brokers offer options to invest in both ETFs and stocks, but futures trading is less common and considered more specialized. If you’re interested in investing in commodities, it’s important to find a broker that offers access to major futures exchanges unless you plan to invest only through ETFs.

Security and Reputation

Trusting that your broker takes good care of your investments and has your best interests in mind is important. Look for security measures like two-factor authentication to protect your account. Also, make sure they have plans to prevent disruptions or data breaches. These safety measures are essential to keeping your portfolio secure.

Minimum Deposit

We prefer brokers with low minimum deposits to make investing more accessible. However, investors need to have enough capital for futures trading. This helps set up a margin account and handle potential ups and downs without harming their investments too much. Investing in commodities is risky and should only be a part, not the main focus, of your investment portfolio.

Research Tools

Good research tools can make a big difference when investing in commodities. Strong trading platforms can show you market trends through charts, analyze trading volume and how much prices change, and give you important news and event updates. Some brokers might ask you to pay extra for additional data, but the overall costs have come down because of competition. These tools help you make smarter investment decisions.

• “Valuable Metals (Gold, Silver, Platinum, etc.)”

• “Crude Oil”

• “Natural Gas”

• “Fuel”

• “Corn”

• “Wheat”

• “Soybeans”

• “Cattle”

• “Pigs”

• “Sugar”

• “Wood”

“Most futures trading involves financial assets like stocks, interest rates, and currencies, rather than raw commodities. These financial assets generate more trading contracts than agriculture, energy, or metals.”

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