Table of Contents
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Physical Ownership
Investors typically own physical commodities such as precious metals like gold and silver. These metals are highly valued for their tangible nature and are often bought as bullion bars with a defined size and purity. However, owning physical commodities comes with challenges like storage, insurance, and liquidity concerns. Other commodities, such as agricultural products or metals, also present storage challenges, as they can deteriorate over time and must be sold within a set timeframe. This is why many investors prefer not to hold physical commodities directly. To trade in physical commodities, you’ll need to find a reputable dealer and likely secure a storage facility for your assets.
Futures Contracts
Futures contracts are agreements to buy or sell a specific quantity of a commodity at a predetermined price and date. Investors often use leveraged margin accounts to amplify their trading capacity. Most of these contracts are settled in cash, meaning investors don’t have to physically handle the commodities. However, trading futures involves extra paperwork, higher account minimums, and the margin requirement can vary depending on the contract’s value.
Individual Securities
With a standard brokerage account, you can invest in individual stocks of companies involved in commodity production or processing, typically within the energy or basic materials sectors. Investors seeking exposure to commodities via stocks must understand the specific industries involved. For example, mining and energy extraction companies often perform feasibility studies on their reserves, which can impact their stock prices. Larger, multinational companies may be less influenced by the results of a single study than smaller, more localised 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, similar to real estate, are considered alternative investments since they don’t trade like stocks or bonds. However, within the category of precious metals, certain items function more as collectables than traditional investments. Bullion coins and jewellery, for instance, possess aesthetic and historical value, often trading at a premium above their intrinsic metal value. While these items can appreciate, their prices are less correlated with market prices. You can buy jewellery from retailers or coins directly from the Mint or dealers, but they are generally regarded as collectables rather than straightforward commodity investments.
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.
Personal Information
The required personal and financial details include:
- Your full name, residential address, and contact number.
- Your tax identification number is typically your Social Security number.
- Your date of birth and a government-issued ID.
- Bank account details are required to fund the account.
- Investment experience and risk tolerance
With online brokerages, you’ll start by creating an account using a username and password. After that, you’ll be asked to provide additional details during the setup process.
Minimum Deposits
While some brokerage accounts don’t require a minimum balance, activating futures trading in a margin account typically necessitates a few thousand dollars to be maintained with the broker. The amount required to trade will depend on the contracts you’re looking to trade, which could exceed the account’s minimum deposit. The initial and maintenance margins for futures accounts may vary depending on the account type, such as individual retirement accounts (IRAs) versus non-IRA accounts.
What You Need to Open a Gold IRA
Gold individual retirement accounts (gold IRAs) are a retirement investment option involving commodities. Unlike a standard IRA, you must find a custodian to store the physical assets. To set up a gold IRA, you establish a self-directed IRA, select a custodian to manage the account, choose an approved depository to store the gold, and pick a broker or dealer to purchase the gold. Some gold IRA providers offer these services directly or can connect clients with trusted providers in their network.
Personal Information
The documents and details required are similar to those needed for standard investment accounts:
- Full name, address, and contact number
- Tax ID number
- Date of birth and a government-issued ID
- Additional Know Your Customer (KYC) questions
Minimum Deposits
Starting a Gold IRA (Individual Retirement Account) requires a certain investment, as gold holds significant value, with even small amounts costing hundreds of dollars. While the IRS has guidelines on the types of gold eligible for a Gold IRA, they do not specify a minimum deposit. However, most Gold IRA providers suggest a starting investment of at least $2,000. Some providers may have higher minimums, ranging from $10,000 to $60,000. It’s important to be aware of these minimum requirements 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
Opening a Gold IRA (Individual Retirement Account) requires an initial investment, as gold is valuable, with even small quantities costing hundreds of dollars. While the IRS provides regulations on the types of gold allowed in a Gold IRA, it does not mandate a specific minimum deposit. However, many Gold IRA providers recommend starting with at least $2,000. Some providers set higher minimums, ranging from $10,000 to $60,000. It’s crucial to be aware of these minimum deposit requirements before opening a Gold IRA.
Pros
Investors are drawn to commodity investing because it offers protection against inflation, diversifies their investment portfolio, and has the potential for significant profits.
- Inflation hedge: Inflation often occurs when the prices of commodities such as gold or oil rise. Investors closely monitor these prices as they can indicate whether inflation is increasing or decreasing. Occasionally, specific events in the market, like a large crop harvest, can influence the rise in commodity prices. However, in general, commodity prices tend to align with inflation, helping to offset the impact of inflation on other investments in an investor’s portfolio.
- Diversification: Commodities such as gold and oil can be a valuable addition to your investment portfolio, even in times when inflation is stable. Unlike stocks or bonds, their prices are influenced more by supply and demand dynamics than by factors like employment rates or government policies. This makes them distinct, providing a unique opportunity to diversify your investments effectively. Their behaviour is often independent of traditional market trends, making them ideal for risk distribution.
- Potential for large returns: Commodities such as oil, gold, and crops can experience significant price fluctuations due to production cycles. Global events that impact production and transportation, like major storms or technological innovations, can also drive price changes. These volatile price shifts create opportunities for investors to profit, making commodities an attractive option for investment.
Cons
Commodity investing has its downsides. You may not receive regular income from it, and the prices can fluctuate significantly, making it a risky venture. Additionally, external factors such as natural disasters or political events can impact your investment.
- Lack of income: When you invest in commodities like gold or oil, you don’t earn regular income as you would with bonds or stocks that pay dividends. Instead, your profit relies on timing—buying and selling at the right moments when prices rise or fall.
- High volatility: Commodity prices can experience significant changes due to major global events. For instance, wheat prices surged when Russia invaded Ukraine in 2022, impacting how traders handled wheat futures. A similar pattern occurred with oil and gas prices, as Russia was a major supplier.
- External risks: Investing in commodities like gold or oil involves risks that are beyond investors’ control. Conflicts in certain regions can disrupt the supply of goods, while adverse weather can impact production. There are also risks tied to regulations and politics that can hinder the flow of goods. These risks contribute to price volatility, but they also present opportunities for substantial profits.
Factors to Consider When Opening an Investment Account
Not all brokers allow you to invest in commodities like gold or oil. Some online investment managers focus only on ETFs and stocks. However, larger brokers and platforms geared towards trading typically offer futures trading, where you can invest in commodities. Examples include Schwab, Interactive Brokers, and E*TRADE, along with specialised platforms like NinjaTrader and TradeStation. Here are the key factors to consider when choosing a broker for commodities trading.
Customer Support
Different brokers offer varying levels of customer support. Most assist via phone and email, while some also include chat features and social media for customer interaction. However, certain brokers mainly offer support through FAQs and email forms. It’s important to choose a broker that provides support in the way that suits you best.
Fees
Stocks and ETF trading fees have become highly competitive, with many brokers offering zero fees. However, for futures trading, fees are assessed per contract and can range from a few cents to several dollars. While it may be tempting to choose a broker with the lowest fees for futures trading, it’s also essential to consider the overall quality of the trading platform.
Available Assets
Many brokers provide options to invest in both ETFs and stocks, but futures trading is less common and viewed as more specialised. If you’re looking to invest in commodities, it’s crucial to choose a broker that gives you access to major futures exchanges, unless you plan to invest exclusively through ETFs.
Security and Reputation
Trusting that your broker will properly manage your investments and prioritise your best interests is crucial. Look for security features such as two-factor authentication to safeguard your account. Additionally, ensure they have protocols in place to prevent disruptions or data breaches. These safety measures are vital for protecting your portfolio.
Minimum Deposit
We favour brokers with low minimum deposits to make investing more accessible. However, investors need sufficient capital for futures trading. This ensures they can set up a margin account and manage potential market fluctuations without significantly impacting their investments. Investing in commodities is risky and should be viewed as a part of your portfolio, not its primary focus.
Research Tools
Effective research tools can significantly enhance your commodity investing experience. Robust trading platforms provide market trends through charts, analyse trading volume and price fluctuations, and keep you updated with important news and events. While some brokers may charge extra for additional data, overall costs have decreased due to increased competition. These tools are essential for making more informed and smarter investment decisions.
- Precious metals (Gold, Silver, Platinum, etc.)
- “Brent Crude”
- “Natural Gas Resources”
- “Energy Fuels“
- “Corn (Maize)“
- “Grain (Wheat)”
- “Soybean Crops”
- “Livestock (Cattle)”
- “Swine“
- “Sugar Cane”
- “Timber“
Most futures trading focuses on financial assets such as stocks, interest rates, and currencies, rather than raw commodities. These financial assets typically generate more trading contracts compared to agriculture, energy, or metals.
