Why are Investors Interested in Commodities in Times of Inflation?
The present turbulence and uncertainty in the market are reaching critical levels. High inflation rates have rekindled interest in adding commodities as an alternative investment to hedge against inflation risk, increase portfolio diversification and provide additional return potential. Jeff Bezos makes
a rather surprising statement from one of the richest men on the planet. In an interview with CNN, former Amazon boss Jeff Bezos gave some “sound” economic advice to consumers, just days before Black Friday kicks off.
Indeed, the journalist asked the billionaire if people should “batten down the hatches” in these increasingly difficult economic circumstances, marked in particular by rising inflation in many countries of the world.
“My advice to people is to take a measured risk. If you’re an individual and you’re thinking about buying a new big-screen TV, maybe slow down your purchases. Save that money and see what happens. The same thing with a refrigerator or a new car, or whatever,” the Blue Origin CEO said.
HAS AMAZON LOST FAITH IN BLACK FRIDAY?
You’ll agree that this advice is nothing out of the ordinary and just common sense. Nevertheless, it is rather surprising to see this kind of advice coming from one of the richest men on the planet. Especially at the dawn of a period, in this case, Black Friday, known for its good deals. Remember that the e-commerce giant, like many companies, is facing a much more difficult business environment this year than when the pandemic began in 2020.
As reported by our colleagues from the Telegraph, the Seattle firm has revised downwards its sales forecasts for the fourth quarter of 2022 to 140 billion dollars instead of the 155 initially expected. It is also known that Amazon has lost nearly 1,000 billion dollars on the stock market, a first in its history.
In addition, the company recently announced the massive layoff of more than 10,000 jobs out of its 1.5 million employees worldwide. That is almost 3% of the total workforce. Note that it is not the only one since Meta also plans to lay off 11,000 people, as well as Twitter (about 3,000 employees). In any case, we are not sure that Jeff Bezos’ statement has been seen in a good light by the present employees of the American company, not to mention those who were laid off…
But all these billionaires still hide from us the great opportunities to make safe and profitable investments.
So here are the niches that some experts advise their clients.
There are 4 main categories of raw materials:
- Energy raw materials: fossil fuels such as oil, coal, or gas. These are rather rare raw materials because their quantity is limited.
- Agricultural raw materials: wheat, corn, cotton, sugar, coffee, or cocoa for example.
- Industrial metals: metals that are mainly used in industrial activities such as iron, copper or zinc, aluminum, nickel, cobalt, steel, or lead.
- Precious metals: metals that are considered rare because of their high production costs and their sometimes difficult extraction, such as gold, silver, palladium, or platinum.
Why invest in commodities in 2022?
Commodities investment for which profile?
Commodities are suitable for all types of profiles, whether you are a beginner or an experienced investor. However, they are complex assets and certain elements must be assimilated in order to have an adapted trading strategy.
How do commodities vary?
First of all, you need to know that these assets are affected by several factors. Weather conditions have a significant impact on some commodities, such as agricultural production, where weather variations and natural disasters play a considerable role. Seasonal and temperature variations have a significant impact on the production of several commodities and thus impact the price of these products.
The variation of taxes on the export of raw materials in a country can also have a great influence on the price of these products.
During periods of a health crisis or geopolitical tension, raw materials can be affected both at the production level and at the level of their transportation and thus their marketing. Thus, the supply of these commodities is affected because the quantity available decreases as the crises intensify.
The foreign exchange market can also play a major role in the evolution of the prices of certain agricultural raw materials. This is the case of the Brazilian real for coffee prices or the dollar since raw materials are generally expressed in this currency. So when the value of the latter increases, the price of raw materials also increases.
How do commodities vary?
It is important to know that these assets are affected by several factors during periods of a health crisis or geopolitical tension, raw materials can be affected both in terms of production but also in terms of their transportation and therefore their marketing. Thus, the supply of these commodities is affected because the quantity available decreases as the crises intensify.
The foreign exchange market can also play a major role in the evolution of the prices of certain agricultural raw materials. This is the case of the Brazilian real for coffee prices, or the dollar since raw materials are generally expressed in this currency. So when the value of the latter increases, the price of raw materials also increases.
What future for investments in agricultural commodities?
“Russia’s invasion of Ukraine will create a global wheat shortage for at least three seasons by preventing much of the Ukrainian crop from reaching markets, driving prices to record levels,” Ukraine’s agriculture minister told Reuters.
Evolution of the quality of US wheat over 5 years
U.S. wheat quality has improved ahead of the harvest season but remains lower than in the past five years.
Technical analysis of the wheat price
Wheat prices have fallen by more than 28% since the peak of 18/05. The decline seems to have stopped at the support level of 902.53 where the 200 SMA (red line) coincides. However, from a technical point of view, we can see that the RSI is moving below its neutrality zone of 50, which means that sellers are still in control of the market and that the decline could probably resume. In such a context, the aforementioned support would be worth considering.
What future of gold investments?
Gold has had a difficult time, with the war in Ukraine triggering a price jump, but it was short-lived. As the Federal Reserve’s rate hike timetable becomes clearer with Jerome Powell’s recent speech on June 22 highlighting that the risk of recession is high and that a “soft landing” will be very difficult to achieve, how will gold react to the next possible 75 basis point hike in July?
Macro focus on gold
Rising interest rates and a strengthening dollar have been the main reasons for the recent drop in gold prices. Rising interest rates are making investors more interested in the money market rather than the safe haven of gold. However, this is not the only obstacle facing gold prices presently.
Distribution of world gold demand between investments and central banks
Investment demand and central bank demand continue to rebound.
Technical analysis of gold prices
What future of oil investments?
After Russia’s invasion of Ukraine propelled oil prices to all-time highs, black gold prices are moving in a mixed fashion. The situation in Ukraine and OPEC+’s upcoming decisions on oil production will be key to oil’s future prospects.
Macro focus on oil
There are two reasons for the recent pullback in oil prices: on the one hand, concerns about the economic slowdown remain; on the other hand, the possibility of additional taxes on the US oil sector has caused panic.
Low oil stocks at the Cushing hub
Inventories at the Cushing hub are at extremely low levels at the start of the typically busy summer period.
The Mediterranean customers of Russian oil
Russia is not only selling more than 50% more oil to China than before the war, Russia is also still very active in the Mediterranean.
Technical analysis of the oil price
Black gold prices recently managed to break through the Ichimoku cloud to the upside, signaling a potential recovery in demand. If present sentiment prevails, oil prices could break through resistance at 115.59 where the 100% Fibonacci retracement of the July 2014 decline coincides. If successful, resistance at 118.71 is the next target for buyers. We note from a technical standpoint that the RSI is about to cross the 50 neutral zones, reinforcing the bullish outlook on oil prices.
How to invest in commodities
Today’s financial markets offer several solutions to investors wishing to invest in commodities. Investors, depending on their risk profile and the profitability they are looking for, will be able to invest in commodities through financial instruments offering different advantages and risks.
Investing in raw materials directly
It is quite possible to buy the commodity directly, i.e. to physically own it. This is the case for precious metals such as gold, in the form of bars or coins. Moreover, gold can be a good investment in times of war and instability because it is considered a safe haven.
Investing in commodities with ETFs
ETFs are exchange-traded funds that can be invested in quite easily. They generally follow benchmark indices that are made up of a group of assets (commodities for example). So you can invest in commodities indirectly by investing in ETFs whose benchmark is made up of commodities. However, in this way, you do not directly own the asset(s), since these ETFs are managed by companies.
Investing in commodities with traditional UCITS
UCITS or Undertakings for Collective Investment in Transferable Securities allow, by delegating the management to a manager, to invest in companies and in this case companies in the commodities sector. This makes it possible to gain exposure to the evolution of commodity prices.
Investing in commodities with derivatives
There is a multitude of derivative products available in the financial markets. We have chosen to present the two main ones used to invest in commodities.
First of all, options, these derivatives give the right to buy or sell a number of underlying assets (shares, currencies, etc.) during a period and at a price agreed upon in advance. They allow you to buy the settlement at the end of the contract, unlike futures contracts.
Contracts for Difference (CFDs) allow you to track the rise and fall of an asset. Contracts for Difference are also leveraged financial instruments. This allows investors to multiply their profit but also their loss in case of the wrong anticipation.
Investing in commodities via the stock market shares of commodity companies
Another way for investors to invest in commodities indirectly is to invest in stocks. For example, if you decide to invest indirectly in oil, you can buy shares in TotalEnergies, Exxon, or BP. Indeed, these companies whose activity is based on oil exploitation depend directly on the factors which have consequences on the oil prices like the decisions of the Opep+, the impact of the fall or the rise of the demand, or the meteorological conditions which can have repercussions on the production. Thus, this allows both investing in commodities but also taking advantage of the benefits of stocks such as dividends.
Our tips for trading and investing in commodities
Commodities are a relatively complex asset class because, as mentioned above, they are subject to a number of factors that directly influence the production and demand of these assets. They are characterized by significant volatility due to the number of factors that cannot be controlled or even predicted. This is why it is wiser to focus on one or two commodities when starting to trade commodities, in order to properly assimilate the stakes and the environment of these assets. The choice of the financial instrument through which one wishes to invest must also be studied beforehand, in order to have a trading strategy adapted to the risk profile of the investor.
All our information is, by nature, generic. It does not take into account your personal situation and does not constitute in any way personalized recommendations for the realization of transactions and cannot be assimilated to a service of advice in financial investment, nor to any incitement to buy or sell financial instruments. The reader is solely responsible for the use of the information provided, without any recourse against the publishing company of Cafedelabourse.com being possible. The publishing company of Cafedelabourse.com cannot be held responsible for any error, omission, or inappropriate investment.