Should you invest in commodities during inflation?

Commodity prices tend to increase when inflation is on the rise, therefore investing in commodities may provide a good hedge against inflation for investment portfolios. Raw materials including oil, natural gas, precious metals, wheat and corn are generelly considered as a good investment in times of high inflation. In fact, rising commodity prices are often a leading underlying cause of consumer price inflation, which tracks how the prices paid by consumers increase.

As an example, the correlation between the annual growth of the Bloomberg Commodities Index and the U.S. Consumer Price Index on a 10-year horizon is 0.73, which underscores the effectiveness of commodities as an inflation hedge. 

What are some examples of commodities?

A commodity is a basic good or raw material that is used to create products that consumers purchase, and which is often traded in large quantities on exchanges. Some examples of popular tradable commodities are:

• agricultural products: wheat, cattle, grains, beef, corn
• energy products: oil, natural gas
• precious metals: gold, silver, aluminum

While inflation can usually have a negative impact overall on an economy, some commodities can benefit from periods of inflation. Here are some commodities that are typically considered to be good hedges against inflation:

• Gold: This previous metal is often seen as a safe haven asset during times of economic uncertainty and inflation. Historically, gold has maintained its value during times of high inflation.
• Energy products: Energy commodities like oil and natural gas are often considered to be good investments against inflation.
• Agricultural products: Food prices tend to rise during times of inflation, making agricultural commodities like wheat, corn and soybeans attractive investments.

There are several ways to own commodities, from buying the actual thing in physical form, to buying a piece of paper that represents the commodity, or buying into a fund that tracks an index of companies that are active in a the sector of that commodity. Here's a rundown, with some examples:

• physical commodity: own the physical commodity itself, e.g. a gold coin 
• mutual fund or exchange-traded fund (ETF): buying into a mutual fund that invests in the given commodity, for example by buying shares in oil companies. E.g. Vanguard Energy ETF, a broad oil stock ETF. 
• company stocks: buy shares directly in companies that are active in a commodity's sector. e.g. buying stock in Wheaton Precious Metals, a silver mining company.
• futures contract: these are more advanced investments, where you enter into a contract to buy or sell a commodity, at a predetermined price and time. E.g. wheat futures.

Below are some options for great brokers where gold ETFs, one of the easiest ways to invest in a popular commodity, are available: 

• Interactive Brokers
• DEGIRO
• eToro
• Trading 212
• Fidelity

You can also check out our lists of the best brokers for ETFs and the best futures brokers in general.

Commodity prices are the prices at which materials used in the production of basic goods and products are bought and sold on global markets. These include products such as precious metals (gold, silver, copper), energy commodities (oil, natural gas), agricultural products (wheat, corn, soybeans) and other raw materials (e.g. timber, rubber).

The prices of commodities are determined by a variety of supply and demand factors, ranging from weather conditions to political upheaval, such as wars. These prices are closely watched by traders, investors, and governments as they can have a significant impact on the global economy as well as the well-being of a country.

You can track the current market prices for some popular commodities – gold, oil, wheat – on the interactive chart above.

What currency and units are commodity prices given in?  

Commodity prices are typically given in the currency of the country where the commodity is traded, with US dollars ($) being the most widely-used currency. The unit of measurement used in the prices depends on the commodity. Here are some common units used for measuring commodity prices:

• Precious metals are typically quoted in dollars per ounce (oz)
• Prices for crude oil, natural gas, and other energy commodities are usually quoted in dollars per barrel (bbl) or per thousand cubic feet (Mcf)
• The prices of agricultural products like wheat, corn, and soybeans are generally quoted in dollars per bushel, while prices for livestock (like cattle) are quoted in dollars per pound (lb)