3 reasons why investing in commodities will always be in style

3 reasons why investing in raw materials will always be in style

What do coffee, cocoa, corn, cattle, and cotton have in common? They are all part of an asset class called commodities, which is all over the news these days. But according to financial experts, commodities are more than just a trend: they are considered perennial assets that can complete and strengthen any investment portfolio. Why are they so popular? Discover the three main reasons why they will always be in style.

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1. Commodities are a hedge against inflation

Imagine the following: You are in the supermarket and you pick up a box of your favorite cereals and notice that they are more expensive. This is because the price of the raw materials used to produce these products, such as grain or sugar, has risen. At the same time, the value of the currency has decreased, which means that a euro or an insert-your-coin-here can no longer buy you the same amount of a product as before.

This is called inflation, and while it occurs naturally in any economy when the supply and demand for things get a little out of balance, it’s still puzzling.

Commodities are considered a good protection, or hedge, against the negative effects of inflation. Unlike other types of assets, the value of commodities tends to rise during inflationary periods. As the demand for raw materials increases during inflation, so does their value. Therefore, people who have invested in commodities can earn money even if the global value of the currency has fallen.

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2. Commodities help you diversify your portfolio

Speaking of farm goods, chances are you’ve heard the saying “don’t put all your eggs in one basket.” It is a phrase widely used in the world of investment when talking about one of the golden rules of investment: diversification.

Diversifying your portfolio means reducing risk by spreading your investments across many different asset classes. As we have learned, the performance of commodities has a low to negative correlation with the performance of stocks, fiat currencies, and cryptocurrencies. In the example of inflation, this means that your commodity investments probably won’t be affected even if the value of fiat currencies plummets. Therefore, adding commodities to your portfolio can be a smart way to diversify.

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3. Raw materials can bring benefits

Although investments in raw materials carry inherent risk, there is still a strong and inherent global demand for raw materials such as oil, soybeans, corn, sugar, cattle and others, to the point that when the production of these raw materials cannot meet the increased demand (such as during the pandemic or because of the war in Ukraine), the market turns to alternatives. For example: Ukraine is the world’s largest producer of sunflower oil, but has not been able to export its supply and meet regular demand due to the Russian invasion. Consequently, other vegetable oils, such as rapeseed oil, have seen increased demand to fill the gap and allay fears of future supply problems.

This relentless demand is having a positive impact on the shares of companies that deal in commodities, which in turn is good news for people who invest in these companies and who are likely to see a positive return on their investments.

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Ready to invest in raw materials?

Do the raw materials convince you? You can start investing in 30 of them on Bitpanda from just €1. As always, you can buy, sell or trade your assets whenever you want, even when the markets are closed.

If you don’t feel ready yet, read more about commodities and ETCs on Bitpanda Academy.

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