Everything you need to know about commodities

Types of commodities explained

Commodities are usually grouped into three broad categories: energy, metals, and agriculture. Each category has its own characteristics, plays a different role in the economy, and reacts differently to global events.

Every aspect of the modern economy, from shipping goods to powering homes, relies on energy. Without reliable access to energy, transport, production, and even basic services could come to a standstill. The most widely traded energy commodities are crude oil, natural gas, and refined products such as diesel and petrol, with coal and, in many regions, electricity also actively traded.

Oil is more than just transport fuel. It is an important input for plastics, chemicals, and synthetic fibres, while many fertilisers are produced primarily from natural gas. Because of this, oil prices may affect supply chains — influencing the cost of goods from food packaging to clothing. The oil market is also sensitive to geopolitical events. Conflicts in producing regions, production decisions by OPEC and its allies (OPEC+), and global recessions or recoveries may all cause prices to change sharply.

Natural gas has a different profile. It is essential for heating, electricity generation, and industrial use, but unlike oil, it is harder to transport. Gas markets rely on pipelines and liquefied natural gas (LNG) exports and regasification facilities, which means regional bottlenecks often play an important role. Prices may spike during harsh winters in Europe or Asia, while mild weather can push them lower.

Coal remains a significant energy commodity in some parts of the world, particularly in Asia, although its role is declining in regions that are shifting towards cleaner energy. At the same time, the global push for renewable energy, such as wind and solar power, add long-term uncertainty to demand for fossil fuels.

Energy commodities are among the most actively traded globally, but they are also exposed to multiple risks: political instability, environmental regulations, supply chain constraints, and the broader transition towards low-carbon energy sources.

Metals are another key part of the commodities market, and they are typically split into industrial metals and precious metals.

Industrial metals such as copper, aluminium, zinc, and nickel are the building blocks of infrastructure, construction, and technology. Copper wiring powers electrical grids, aluminium is key to lightweight vehicles and packaging, and nickel is important for stainless steel and increasingly for some batteries used in electric vehicles (EVs). Because demand for these metals rises and falls with industrial activity, their prices are sometimes seen as indicators of economic health. For example, copper is sometimes called “Dr Copper” for its reputation as a guide to the state of the global economy. However, these markets may be volatile, affected by strikes, mining challenges, environmental rules, or the substitution of one material for another.

Precious metals — gold, silver, platinum, and palladium — have long histories as stores of value. Gold (and sometimes silver) are often described as “safe-haven” assets, while platinum and palladium are more driven by industrial demand. Silver has both investment and industrial uses. Platinum and palladium are critical in catalytic converters for vehicles and are also important for technology and industry. These metals may attract attention during times of market stress. Yet they remain volatile, and unlike equities or bonds, they do not generate regular income.

Specialist metals such as lithium, cobalt, and rare earth elements have gained importance in recent years. They are essential for batteries, renewable energy technologies, and electronics. While not as widely traded as gold or copper, they show how changing technologies may influence demand patterns across the metals market.

Metals are therefore both practical and symbolic: they provide the raw materials for growth while also reflecting investor confidence, caution, and wider economic trends.

Agricultural commodities represent the most diverse group, covering everything from staple crops to cash crops and livestock. They are usually divided into grains and oilseeds, soft commodities, and livestock.

Grains and oilseeds include wheat, maize, soybeans, oats, rapeseed (canola), and barley. These are staples of the global food system, used not only for direct consumption but also as animal feed and biofuel feedstocks. Their prices may be influenced by weather conditions, crop yields, global demand, and government policies. For instance, subsidies or export bans can play a significant role in shaping availability and pricing.

Soft commodities include coffee, cocoa, sugar, frozen concentrated orange juice, and cotton. These crops are mainly grown in tropical and subtropical regions, which makes them especially vulnerable to climate conditions and disease. A drought in Brazil may affect coffee yields, while crop diseases in West Africa may disrupt cocoa production. Because demand for these goods tends to be relatively steady, supply disruptions may quickly lead to sharp price movements.

Livestock markets cover cattle, pigs, and other animals, traded in physical markets and actively via futures contracts (for example, live cattle, feeder cattle, and lean hogs). Prices depend on feed costs, animal health, veterinary standards, export regulations, and changing consumer diets. The rise of plant-based alternatives in some markets has added another dimension to livestock demand trends.

Agriculture is central to global food security but is also one of the most unpredictable areas of the commodity market. Seasonal cycles, extreme weather events, pests, and policy decisions may all cause sudden price swings. For some, agriculture may provide diversification benefits, but it remains highly exposed to risks outside of investors’ control.

How does the commodities market work?

The commodities market is a vast, interconnected system where raw materials are bought and sold. Unlike stock markets, which deal in company shares, commodity markets trade physical goods — either for immediate delivery on the spot market or for future price exposure/delivery via futures, options and OTC forwards or swaps. Most futures are closed before expiry and many are cash-settled, so physical delivery is relatively rare. Saxo Bank does not offer physical delivery.

Major exchanges act as global hubs for price discovery, central clearing and margining. CME Group (which includes NYMEX and CBOT), the Intercontinental Exchange (ICE), and the London Metal Exchange (LME) are among the most influential. They provide benchmarks for prices worldwide (for example, ICE Brent crude, CME WTI crude, LME Copper) and serve as marketplaces where producers, buyers, and financial participants may transact in everything from oil and natural gas to metals, grains, and livestock.

Participants in commodity markets are diverse:

• Producers such as farmers, miners, and oil companies, often using markets to hedge future prices, who sell the raw materials they produce.
• End users such as manufacturers, food companies, and energy utilities, who buy commodities as inputs for production and may hedge costs.
• Speculators and investors who trade commodities based on expectations of price movements rather than intending to take delivery of the physical goods.

Prices are driven primarily by supply and demand, but they may also be shaped by external factors: geopolitical tensions, monetary policy, weather disruptions, technological advances, and shifts in consumer behaviour. For example, a surprise increase in production or an announced discovery that signals higher future supply may depress prices, while a hurricane disrupting exports may send prices soaring.

In recent years, retail and institutional investors have increasingly gained exposure through exchange-traded products, index funds, and other financial instruments that track commodity prices. This trend may have made commodities more accessible, but it can change trading dynamics as financial flows respond to investor sentiment as well as to physical supply and demand, at times amplifying price moves.

Ways to invest in commodities

There are many ways to gain exposure to commodities, each with its own complexity, cost and risk. Some involve direct ownership of the asset, while others use financial products to track commodity prices. Below are the main approaches, ordered from the most hands-on to the more accessible.

The most straightforward approach is to buy and hold the commodity itself. Examples include gold bars, silver coins, or — in theory — agricultural goods such as coffee beans or oil barrels.

In practice, physical ownership is usually limited to precious metals like gold and silver. These are durable, relatively easy to store compared with other commodities, and widely recognised as investment-grade products. Some people view physical gold as a way to diversify because it is not tied to the fortunes of a single institution.

But there are practical challenges. Physical assets may require secure storage, insurance and transport, and some commodities (like oil or grain) are not typically practical for individual ownership without specialist storage or custody. For most investors, physical holdings are a small complement — such as gold coins — rather than their primary form of exposure.

Futures contracts are central to the commodities market. They are agreements to buy or sell a commodity at a fixed price on a future date. Producers and consumers use them to manage price risk, while speculators use them to trade based on expectations of future movements.

Options on futures give the right, but not the obligation, to buy or sell at a set price within a defined timeframe. They add flexibility but also complexity.

These instruments may offer precise exposure, but they are complex and risky. Futures and options involve leverage and margin requirements. Losses on futures (and short options) may exceed initial deposits, while the maximum loss on a long option is the premium paid. As such, they are generally more suited to experienced market participants than beginners.

Commodity ETFs provide exposure without the need to handle physical goods or trade futures directly. In many markets, single-commodity products are structured as exchange-traded commodities (ETCs) or exchange-traded notes (ETNs), which are debt securities and carry issuer risk. Listed on stock exchanges, these vehicles can be bought and sold like shares.

Some ETFs track the price of a single commodity, such as gold or oil. Others follow a basket of commodities, covering multiple sectors like energy, metals and agriculture.

ETFs are generally considered accessible and relatively low cost, though their performance can be affected by factors such as fund structure and futures pricing. For example, ETFs that use futures contracts may be affected by contango (where futures prices are higher than the spot price) or backwardation (where they are lower), which may affect returns over time. This makes it important to understand how an ETF is structured.

Commodity mutual funds operate similarly to ETFs but are actively managed by professionals who allocate assets based on research and market analysis.

These funds may invest directly in commodities or indirectly through commodity-related businesses. For instance, an energy-focused fund may hold shares in oil producers, pipeline operators and renewable energy companies.

The benefit is diversification and professional management, though this may come with trade-offs such as higher fees and reduced flexibility, since mutual funds do not trade throughout the day like ETFs.

Another indirect way to invest in commodities is by buying shares in companies that produce, refine, transport or sell raw materials. This could include miners, oil and gas firms, agricultural businesses or trading companies.

Commodity stocks may move in line with the price of the underlying commodity, but can also diverge due to hedging, costs and company-specific factors. For instance, when the price of copper rises, shares in copper mining companies may benefit — but outcomes still depend on management decisions, debt levels, operational efficiency and broader market conditions.

Still, for those who want to blend commodity exposure with the potential growth of equities, this can be an attractive route.

Finally, broad commodity funds and ETPs provide diversified exposure across multiple commodities or commodity-linked assets. These vehicles may hold physical commodities, futures contracts or shares of companies involved in production and distribution.

Because they spread investments across sectors and instruments, they may help smooth out the impact of volatility in any single market. They are sometimes chosen by those who want broad-based exposure without focusing on a single commodity.

As with any pooled vehicle, the details matter: fees, strategy and risk profile should all be considered carefully.

Energy, metals and agriculture may look very different, but together they form the foundation of the world economy. They shape everything from the price of food to the cost of transport, the pace of construction and the roll-out of new technologies.

For investors, commodities may be considered as part of a diversified approach. Beyond investment, however, they matter because they connect the natural resources of the planet with the goods and services people use every day.

Understanding commodities is ultimately about seeing how the world runs — the fuel that powers vehicles, the metals that build infrastructure and the crops that sustain populations.

What are the benefits of investing in commodities?

Commodities offer a unique set of potential benefits that distinguish them from more traditional investments like shares and bonds. Whether you’re looking for protection against inflation, diversification, or a way to participate in market cycles, commodities can add an important dimension to a portfolio.

One of the key arguments for investing in commodities is their diversification benefit. Historically, commodities have shown periods of low or even negative correlation with shares and bonds. This means they may sometimes rise in value when other parts of a portfolio are under pressure, particularly during economic shocks or inflationary periods.

However, these relationships are not fixed. At times, commodities have moved in the same direction as shares, especially during global downturns. Diversification benefits may therefore vary depending on the commodity, the timeframe, and wider market conditions. While commodities may reduce portfolio volatility in some scenarios, they may also add to risk in others.

Because commodities are physical goods, their prices can be linked to the cost of living. Energy, food, and raw materials are part of everyday expenses, so when inflation rises, commodity prices may also increase. Gold, for example, is sometimes described as a store of value during periods when fiat currencies are losing purchasing power. Oil and agricultural products may also see price rises when inflation is high, although the relationship can differ across markets and timeframes.

That said, commodities are not a guaranteed hedge. Their performance during inflationary periods has varied across time and regions. For instance, gold has sometimes held value, but in other periods it has fallen even as consumer prices rose. Using commodities as an inflation buffer therefore carries both potential benefits and limitations.

Commodities are highly sensitive to supply and demand dynamics, geopolitical events, weather patterns, and economic data, which can drive both sharp gains and steep losses. This volatility creates opportunities for traders to express views on both rising and falling markets. Instruments such as futures and options may allow participants to express views on these movements. Futures-based strategies can also be affected by term structure (contango/backwardation), roll costs, and tracking differences versus spot prices.

Yet this same volatility also represents one of the greatest risks. Sudden market shifts may result in substantial losses, especially when leverage is involved. For many traders, the speed and unpredictability of price changes make commodity markets both appealing and hazardous.

Another distinctive feature of commodities is their physical nature. Unlike shares or bonds, which are financial claims on companies or governments, commodities are real goods with practical uses. Gold can be stored, oil can fuel transport, and wheat can feed populations. This tangibility is sometimes valued by investors who prefer assets that can, in some cases, be held outside of the financial system.

Still, physical ownership comes with challenges. Storing metals requires security and insurance, agricultural goods may perish, and transporting energy products is complex. The reassurance of holding a tangible asset may therefore be balanced against significant practical costs.

Commodities may offer potential benefits such as diversification, inflation sensitivity, and the appeal of physical assets. But they also carry substantial risks, including volatility, storage challenges, and sensitivity to unpredictable global events. For those interested in this area, understanding both sides of the equation is essential before deciding how commodities might, or might not, fit within a broader financial strategy.

What are the risks of investing in commodities?

While commodities can offer valuable diversification and a hedge against inflation, it’s important to recognise that they are not risk-free. In fact, certain commodity investments may be more volatile than stocks or bonds. Understanding these risks is important before deciding whether commodities might play a role in a broader financial strategy.

Let’s walk through the main types of risk you might encounter as a commodity investor.

Perhaps the defining characteristic of commodity markets is their volatility. Prices may swing sharply over short periods, driven by factors that are often outside anyone’s control. Extreme weather, geopolitical tensions, natural disasters, and sudden changes in supply or demand can all send markets surging or crashing.

For example, drought conditions in the US Midwest or Brazil may cause wheat and soybean prices to spike. Conversely, bumper harvests may push prices sharply lower. In energy markets, a single announcement about OPEC production cuts — or an unexpected escalation in a conflict affecting oil-producing regions — may move crude oil prices sharply within hours or days.

This unpredictability may make commodities challenging for long-term investors, who could be tempted to reduce positions during downturns. For short-term traders, volatility may create opportunities, but it also magnifies the potential for rapid and substantial losses if markets move the wrong way.

Many commodities are produced in countries or regions that are politically or economically unstable. This can create vulnerabilities in supply chains and add layers of uncertainty for investors.

Energy commodities are especially sensitive to geopolitical events. Conflicts in the Middle East, sanctions on major producers such as Russia or Iran, or diplomatic tensions around shipping routes may all disrupt supply and move global prices.

Economic conditions also play a role. Industrial metals such as copper, aluminium and nickel are closely linked to global growth. When economic activity slows, demand for these metals often declines, placing downward pressure on prices. The reverse may occur during periods of expansion.

For investors, the key challenge is that these risks are largely beyond individual control. Heavy exposure to one commodity or one region may increase vulnerability to sudden geopolitical or economic shocks.

Liquidity refers to how easily an asset can be bought or sold at a fair price. In commodities, liquidity may vary widely between markets.

Some commodities — such as crude oil, gold, or major ETFs linked to broad indices — trade in large volumes every day. These markets are generally liquid, making it relatively easy to enter or exit positions quickly.

Others, including certain agricultural goods or niche metals like cobalt or molybdenum, may have limited trading activity. In these cases, finding a buyer or seller at short notice may be difficult. Investors may need to accept a lower price to exit quickly, or hold longer than intended until a counterparty emerges.

Even within futures markets, liquidity may dry up during periods of stress, widening bid-ask spreads and raising transaction costs. For investors, this means liquidity risk may add another layer of uncertainty beyond simple price movement.

When using futures or exchange-traded products, returns may differ from spot prices due to basis changes (the gap between futures and spot) and roll gains/losses when contracts are renewed. This tracking difference can be positive or negative and may persist.

A defining feature of many commodity strategies — especially futures and some ETPs — is the widespread use of leverage. Futures contracts, in particular, allow participants to control large positions with relatively small amounts of capital (known as margin).

Leverage may amplify profits, but it equally magnifies losses. If the market moves against a position, the investor may be required to deposit additional funds to maintain it. A margin call is the request for more funds; if it isn’t met, the broker may liquidate positions to restore margin, potentially crystallising a loss. In volatile markets, this can happen very quickly — sometimes in hours.

For beginners, the speed at which leverage turns small price changes into large gains or losses can be difficult to manage. Even experienced traders may find that leverage adds significant stress and risk. For this reason, leverage is often approached with caution, and some investors prefer to avoid it altogether.

Commodities are sometimes viewed as a hedge against inflation, since physical goods may rise in price alongside the cost of living. However, this relationship is not always consistent.

If central banks raise interest rates aggressively to combat inflation, the effect on commodities may be mixed. Higher borrowing costs can reduce demand for raw materials by slowing industrial activity. Rising rates can increase financing and storage (cost-of-carry) costs for holding inventories, which may weigh on prices.

For example, during some past inflationary periods gold has held value, but in others it has underperformed despite rising consumer prices. Similarly, oil and agricultural products may not always move in line with inflation if economic conditions dampen demand.

Most commodities are priced in US dollars, which introduces an additional risk for international investors. Currency movements may affect returns even when commodity prices themselves remain stable.

Take the example of a UK-based investor holding oil contracts denominated in dollars. If the pound weakens against the dollar, the value of that investment rises in sterling terms. If the pound strengthens, the opposite occurs — reducing the local value of the holding even if oil prices remain unchanged.

Currency risk may therefore either amplify or offset commodity price changes. This adds another layer of complexity for those investing from outside the US.

Some exchange-traded products (e.g., ETCs/ETNs) are debt securities and carry issuer/counterparty risk. Over-the-counter (OTC) derivatives also introduce counterparty exposure, which is mitigated — but not eliminated — by collateral and clearing.

Commodities may provide diversification benefits or act as an inflation-sensitive asset, but they also carry a wide range of risks. From volatility and leverage to geopolitical tensions and currency exposure, these markets are shaped by forces that can change suddenly and dramatically.

For anyone considering commodities, recognising both the potential advantages and the substantial risks is essential. Without that balance, it is easy to underestimate just how unpredictable these markets may be.

How to start investing in commodities

For newcomers, the world of commodity investing may appear daunting. These markets are global, complex and influenced by a wide range of factors. Yet gaining exposure is more accessible today than ever before, thanks to online platforms and financial products designed for different levels of experience. The key is to align your approach with your goals, your risk tolerance and the amount of time you want to dedicate to managing your investments.

Every investment decision begins with clear objectives. With commodities, this is especially important because the asset class behaves differently from traditional shares and bonds. Ask yourself what role commodities might play in your portfolio.

• Diversification. Adding an asset class that does not always move in line with equities or bonds.
• Inflation sensitivity. Holding assets that may rise in value when the cost of living increases.
• Active trading. Speculating on short-term price movements.
• Long-term exposure. Owning real assets that may retain value over decades.

Your answers will shape the best route forward. Equally important are practical considerations: how much volatility you are comfortable with, your time horizon and whether you prefer a hands-on or hands-off approach.

Once you understand your goals, you can compare the main ways of accessing commodity markets. Each comes with advantages and risks:

• Exchange-traded funds (ETFs) and mutual funds. May provide diversified exposure without requiring direct participation in futures markets. In many markets, single-commodity products are structured as exchange-traded commodities (ETCs) or exchange-traded notes (ETNs), which are debt securities and carry issuer risk. These vehicles are accessible through most online brokerages and are often viewed as one of the simpler ways to gain exposure. Risks may include management fees, tracking differences and, in the case of futures-based ETFs, performance erosion due to market structures such as contango (when futures prices are above today’s price) and, sometimes, backwardation (when they are below it).
• Futures and options. Provide direct access to commodity markets and allow participants to take positions on both rising and falling prices. These instruments involve leverage, so gains and losses can be magnified. Losses on futures (and short options) may exceed initial deposits, while the maximum loss on a long option is the premium paid. They require a higher degree of knowledge and carry significant risk, particularly for those new to investing.
• Commodity-related stocks. These include mining companies, oil producers or agricultural firms and provide indirect exposure. While these stocks may move in line with the underlying commodity, they are also influenced by company performance, debt levels, management decisions and broader equity market trends.
• Physical ownership. Commodities like gold coins or bullion appeal to those who prefer tangible assets. While gold and silver are durable and widely recognised, storage, insurance and transaction costs may reduce their appeal for some investors. Physical ownership of other commodities (such as oil or grain) is generally not practical for individuals without specialist storage or custody.

No single method is “best” for everyone. To balance liquidity, diversification, and risk, some investors use a mix of approaches, such as combining exposure to a commodity ETF with shares in a mining company.

To access commodities, you will need to work with a regulated broker or investment platform that offers the products you are interested in. Options may include:

• Full-service investment platforms that provide access to funds, ETFs and research.
• DIY brokerages where you can buy shares, ETFs and, in some cases, commodity-linked products.
• Specialist futures brokers for those intending to trade contracts directly.

The choice of provider may depend on your level of experience and the type of exposure you seek. Whatever platform you choose, it is important to confirm that it is regulated in your jurisdiction and provides transparent fees, security protections and educational resources. Commodities can be complex, so strong research tools may help you make more informed decisions.

For those who are new to commodities, you may want to begin with a small allocation and gradually increase exposure as your understanding and confidence grow. The right size of allocation depends on personal circumstances — including your broader portfolio, your financial goals and your tolerance for risk.

Some platforms also offer demo accounts that simulate real trading with virtual funds. These can be useful for practising strategies and observing how commodity prices respond to economic news or geopolitical events, without risking capital.

Learning is an ongoing process. Commodity markets are influenced by global supply chains, political decisions and technological developments, all of which can change rapidly. Staying informed through reliable news, economic reports and market analysis may help you adapt to these shifts.

Commodity trading strategies explained

Commodities can play many roles in a portfolio, from long-term inflation hedges to short-term speculative plays. The strategy you choose will depend on your goals, experience level and risk tolerance. Here are some of the most common strategies you can consider.

Many investors include commodities in their portfolio for long-term stability and diversification. This strategy often involves buying and holding assets like gold, silver or broad-based commodity ETFs or exchange-traded products (ETPs) over a period of years.

Precious metals, especially gold, are often viewed as long-term hedges against inflation and currency devaluation, though results vary across time periods. Meanwhile, diversified commodity funds or ETFs/ETPs can offer exposure to a basket of energy, metals and agricultural products, spreading out risk across sectors.

This approach suits investors who want to own real assets and are comfortable riding out short-term volatility for potential long-term benefits.

For more active investors, commodities offer opportunities for short-term profits based on market movements. This style of trading is often applied through futures contracts or leveraged exchange-traded products (ETPs), where price swings can be significant — and fast. Leveraged ETPs typically reset daily, so multi-day returns can diverge from the stated multiple due to compounding.

• Technical analysis. Using charts and indicators to identify entry and exit points.
• News-based trading. Reacting to breaking headlines (e.g. weather reports, geopolitical tensions, OPEC announcements).
• Momentum strategies. Buying rising commodities and selling those in decline.

Short-term trading can be rewarding, but it also requires discipline, constant market attention and a strong understanding of risk management — particularly when leverage is involved. Losses can exceed the initial investment on futures or short options, whereas losses on long options or fully funded ETPs are limited to the premium or capital invested.

Commodities can also be used to hedge against risks in other parts of a portfolio. This is particularly common among institutional investors, businesses and commodity producers.

• An airline might use oil futures to hedge against rising fuel costs.
• A farmer might sell wheat futures to lock in prices ahead of harvest.
• An investor holding stocks might buy gold as a defensive position during market uncertainty.

Retail investors can also adopt hedging techniques. For instance, holding gold during inflationary periods or investing in agricultural ETPs during supply chain disruptions may help offset risks, though correlations vary and tracking differences can occur. Hedging is less about making gains and more about reducing losses, an important concept for investors who want to smooth out returns over time.

At the other end of the spectrum is speculative commodity trading, where the goal is to profit from price movements, often with leverage and short time frames. This is where futures contracts, options and leveraged products come into play.

Speculators don’t necessarily want to take delivery of the commodity. Instead, they aim to profit from price movements by buying and selling based on their expectations of future price direction.

While this approach can deliver strong returns, it also involves significant risk. Price movements can be sharp and unexpected, and losses can exceed the initial investment on leveraged derivatives positions. Speculation in commodities is best left to experienced traders who understand both the markets and the tools they’re using.

What are commodity futures?

Commodity futures are one of the most important tools in the global commodities market — and they’re at the heart of how many investors and companies manage exposure to raw materials. But what exactly are they, and how do they work?

A futures contract is a legal agreement to buy or sell a specific amount of a commodity at a predetermined price on a set date in the future. These contracts are standardised and traded on regulated exchanges. Here’s how that works in practice.

Imagine you agree today to buy 1,000 barrels of crude oil for delivery in three months, at $80 per barrel. That’s a futures contract. You’re locking in the price now, regardless of where oil trades in the future.

Of course, most traders don’t actually want the physical barrels. They trade the contract itself, aiming to profit from changes in price between now and the expiry date. Most futures positions are closed before expiry or are cash-settled; taking physical delivery is relatively rare. Saxo Bank does not offer physical delivery ever.

• Producers. To lock in prices and protect against falling markets.
• Consumers. To manage costs by hedging price risk (securing physical supply typically requires separate arrangements).
• Investors and portfolio managers. To gain diversified or tactical exposure without holding physical commodities.
• Speculators. To profit from price movements without touching the physical commodity.
• Market-makers/liquidity providers. To facilitate trading and manage inventory/hedges.

• CME Group (including NYMEX and CBOT). Home to major energy, metals and agricultural contracts.
• Intercontinental Exchange (ICE). Offers futures on oil, cocoa, coffee and more.
• London Metal Exchange (LME). The global centre for industrial metals like copper, aluminium and zinc, where trading is primarily in prompt-date forwards (alongside futures and options).

Each contract has specific details, known as specifications, including the quantity, quality, delivery month/date and pricing mechanism. These are standardised, which makes them easier to trade and compare.

Suppose you believe the price of gold will rise over the next month. You could buy the nearest standard gold futures contract (e.g., the next monthly contract) at $3,500 per ounce.

If, before expiry, the price rises to $3,550 per ounce, you could sell your contract and lock in the $50 per ounce gain, without ever touching a bar of gold. On COMEX, the standard gold contract is 100 troy ounces, so a $50 move is $5,000 per contract before costs, and profits/losses are settled daily via mark-to-market. But if the price falls instead, your contract would lose value, and you could face a loss.

This example is purely illustrative. Futures trading offers flexibility and leverage, but also demands careful risk management. Profits and losses can be large and fast-moving, which means this type of trading is not suitable for all investors.

One of the reasons futures are popular is because they offer leverage: you don’t need to pay the full value of the contract up front. Instead, you post initial margin (a fraction of the contract’s value) and maintain maintenance margin to keep a position open.

This magnifies potential gains but also increases exposure to losses. If the market moves against you, you may receive a margin call — a request to deposit more funds to keep your position open. If you can’t meet the margin call and account equity remains below maintenance requirements, your broker may liquidate positions to restore margin, crystallising any loss. For this reason, leveraged products like futures are best used with clear strategies, stop-loss levels and strict discipline.

Investing in gold and precious metals

When people think of commodities, gold is often the first asset that comes to mind, and for good reason. Precious metals have played a central role in global finance for thousands of years. Today, they remain one of the most popular and widely held commodity investments.

But gold is just the beginning. Other precious metals, including silver, platinum and palladium, also offer unique opportunities for investors. Understanding their role in a modern portfolio can help you decide whether they belong in yours.

Gold is unique among commodities. It’s not consumed in the same way energy or food is. Instead, it’s valued for its scarcity, durability and role as a store of value.

• Safe-haven asset. Gold is often sought during times of crisis — whether economic, political or financial. When stock markets fall or inflation rises, gold is often seen as a place to preserve value, though outcomes vary across episodes.
• Inflation hedge. Gold has often maintained purchasing power over very long periods, but performance can diverge over shorter horizons. When currencies lose value due to inflation, gold prices may rise in response.
• Currency diversification. Because gold is priced in US dollars, non-US investors have additional FX exposure — which can either amplify or offset local-currency returns.

You can invest in gold in several ways, from physical bullion (like coins or bars) to exchange-traded funds (ETFs) or exchange-traded products (ETPs) such as ETCs/ETNs, mutual funds or mining stocks. Some ETPs are debt securities and carry issuer/counterparty risk; always check the product structure.

Silver shares many of gold’s properties as a precious metal, but it also has significant industrial use. It’s widely used in electronics, solar panels, silver-oxide button batteries, and medical devices.

• It can act as a safe haven during market stress.
• It’s also sensitive to economic activity and industrial demand.
• Silver prices tend to be more volatile than gold, which can offer both opportunity and risk for active investors.

Platinum and palladium are lesser-known but important metals, particularly in the automotive and electronics industries.

Platinum is used in catalytic converters, jewellery and industrial applications.

Palladium is a critical component in petrol-powered vehicle emissions systems.

Both are traded globally, and their prices can be influenced by supply disruptions (often from a limited number of producing countries) and shifts in technology, such as the move to electric vehicles (EVs). While more volatile and less liquid than gold and silver, these metals can add diversity to a commodities portfolio, but they are highly sensitive to auto-sector trends and the EV transition; they may appeal to more advanced investors seeking targeted exposure.

Precious metals highlight the different ways commodities can fit into a portfolio. Gold is often held as a safe haven, silver bridges investment and industrial demand, while platinum and palladium provide specialised exposure tied to technology and industry. Together, they show how commodities can serve not just as inflation-sensitive assets, but also as essential resources shaping the modern economy.

What are agricultural commodities?

Agricultural commodities form the foundation of our food systems, and they also represent a major part of the global commodities market. From the wheat in your bread to the coffee in your morning cup, these raw materials are traded daily by producers, consumers and investors.

As an asset class, agricultural commodities have dynamics driven by seasonal patterns, weather events and global demand.

• Wheat
• Maize (corn)
• Soybeans
• Barley
• Rapeseed (canola)

These crops are essential not only for food consumption, but also for animal feed and biofuel production. Their prices can be influenced by harvest conditions, global stockpiles, planting decisions, export demand, biofuels policy and government measures such as subsidies or export bans.

For example, droughts in major grain-producing regions can trigger price spikes, while bumper harvests tend to push prices lower.

• Coffee
• Cocoa
• Sugar
• Frozen concentrated orange juice (FCOJ)
• Cotton

These commodities are particularly sensitive to weather patterns, labour availability and geopolitics. Severe weather, for example, hurricanes in Central America, can damage coffee crops. A civil conflict in West Africa may disrupt cocoa exports.

Because supply can be disrupted quickly and demand tends to be relatively stable, prices for softs can be volatile, making them a focus for both short-term traders and longer-term investors.

• Live cattle
• Feeder cattle
• Lean hogs

Related ‘animal products’ contracts (e.g., Class III/IV milk, butter and non-fat dry milk) also trade on US exchanges.

These markets are influenced by feed costs, disease outbreaks, trade restrictions and consumer trends (such as dietary shifts). Prices can swing significantly based on weather or feed shortages, as well as changes in global meat demand.

While less accessible to everyday investors than other commodities, livestock can still be traded via futures, exchange-traded products (ETPs) tracking livestock indices, or through exposure to agricultural funds.

Agricultural commodities show how deeply natural cycles, human consumption and global trade are intertwined. They are vital to daily life, yet their prices can be highly sensitive to weather, geopolitics and changing consumer trends. Within the broader commodities market, agriculture illustrates both the essential role raw materials play in sustaining populations and the complex risks that come with investing in them.

What drives agricultural commodity prices?

• Climate and weather. Droughts, floods and hurricanes can damage crops and reduce supply; pests, disease and El Niño/La Niña can also shift yields and planting decisions.
• Global demand. Population growth and dietary shifts (such as rising meat consumption in developing countries) influence demand.
• Government policies. Subsidies, tariffs, biofuel mandates and export bans/quotas can affect supply chains and pricing.
• Currency movements. Many agricultural products are priced in US dollars; a stronger dollar tends to raise local-currency costs for non-US buyers, while a weaker dollar tends to lower them.

Understanding these forces is important for anyone exploring agricultural commodities, particularly if you are considering futures or short-term trades.

• The 2007–08 food crisis. A combination of poor harvests, rising oil prices and government export bans sent the cost of basics like wheat and rice soaring. In some parts of the world this led to shortages and even street protests, showing just how much food prices can impact everyday life.
• The 2022 Ukraine war. Ukraine is one of the world’s top exporters of wheat, maize (corn) and sunflower oil. When conflict disrupted shipments through the Black Sea, global grain prices jumped sharply, feeding into higher food bills everywhere from Europe to Africa.

These episodes highlight how agricultural commodities are not just about farming — they are tied to geopolitics, global trade and even the cost of your weekly groceries.

• Agricultural ETPs/ETFs. These track baskets of commodity futures or companies involved in food production. Some ETPs (e.g., ETCs/ETNs) are debt securities and carry issuer risk. Products using futures can differ from spot prices due to roll gains/losses.
• Futures contracts. For more experienced traders seeking direct exposure to individual crops or livestock.
• Mutual funds. Actively managed funds that invest in agricultural commodities or related stocks.
• Agribusiness stocks. Investing in companies such as fertiliser producers, farm-equipment makers or large-scale food distributors. Company-specific factors mean returns can diverge from commodity prices.

Agricultural investing may offer diversification and can sometimes act as a hedge against specific risks — though correlations vary over time and hedges can be imperfect — particularly during periods of food inflation or global supply chain disruption.

What are energy commodities

Energy commodities power the global economy. From fuelling cars and planes to heating homes and running factories, these resources are essential to modern life. That is why they are among the most actively traded commodities on global markets, and why they often feature prominently in investor portfolios.

Understanding the energy sector is important if you are thinking about investing in commodities. Let’s break it down.

Energy commodities fall into two main categories: fossil fuels and, increasingly, renewable-linked markets. There are also other traded energy products such as electricity and uranium.

• Crude oil (Brent crude and West Texas Intermediate, or WTI)
• Natural gas
• Refined products like petrol (gasoline), diesel and heating oil
• Coal

Crude oil is one of the most traded commodities in the world. It is also one of the most closely watched, because oil prices affect everything from shipping costs to food prices. Natural gas plays a vital role in electricity generation and winter heating, particularly in Europe and North America.

• Supply and demand dynamics
• Geopolitical tensions (especially in oil-producing regions like the Middle East)
• OPEC and its allies (OPEC+) decisions about production quotas
• Weather patterns, such as hurricanes in the Gulf of Mexico
• Technological advancements, such as improvements in drilling or storage

Energy markets are complex, and they can move quickly in response to global trends.

• The 1973 oil crisis. When OPEC countries imposed an embargo, oil supplies tightened sharply and prices quadrupled. This sparked fuel shortages in many Western nations and highlighted how dependent economies were on Middle Eastern oil.
• The 2022 European gas spike. Following Russia’s invasion of Ukraine, natural gas supplies to Europe were heavily disrupted. Prices surged to record levels, pushing up household energy bills and raising fears of winter shortages.

These episodes show how energy markets are deeply tied to geopolitics and global stability.

While fossil fuels still dominate the market, renewable energy is becoming a more significant area of interest for investors.

• Green energy ETPs/ETFs that focus on renewable technologies or producers
• Carbon markets (emissions allowances and offset credits) via listed futures or specialist platforms
• Companies producing biofuels or building/operating renewable infrastructure

Some ETPs (for example, ETCs/ETNs) are debt securities and carry issuer risk, so it is important to check the product structure.

• Electricity/power. In many regions, electricity is traded on exchanges via day-ahead and futures markets (for example, European power hubs), with prices influenced by fuel costs, demand, weather and grid constraints.
• Uranium. Uranium concentrates (U3O8) are traded via long-term contracts and in the spot market; financial exposure is available through specialised funds or ETPs.

• Inflation sensitivity. Energy prices can sometimes rise alongside inflation, but the relationship varies over time.
• Geopolitics. Energy commodities often react quickly to global events, creating short-term trading opportunities for those following the news closely.
• Economic-growth exposure. Rising demand for oil and gas can coincide with periods of economic expansion.
• Diversification. Energy often behaves differently to shares and bonds, helping spread risk.

However, energy prices can be volatile — sometimes dramatically so. For this reason, they may suit investors who are comfortable with market fluctuations or who prefer targeted exposure through diversified funds rather than direct, single-commodity positions.

What are commodity ETFs and funds?

If you are interested in commodities but do not want the complexity of trading futures contracts or handling physical assets, ETFs and mutual funds are a simple, accessible way to get started. These pooled investment vehicles give you exposure to a range of commodities without needing to manage each one directly. Let’s look at the key types and how they work.

A commodities exchange-traded fund (ETF) is a basket of commodity-related assets that trades on a stock exchange, much like a share.

• Physical commodity ETFs/ETPs. These hold the actual commodity (like gold bullion or silver) in storage. In many markets, single-commodity products are issued as exchange-traded commodities or notes (ETCs/ETNs), which are debt securities and carry issuer risk.
• Futures-based ETFs/ETPs. These invest in futures contracts for commodities such as oil, gas, wheat or copper. Returns can differ from spot prices due to roll gains/losses (contango/backwardation) and collateral yields; leveraged or inverse products typically reset daily, so multi-day returns can diverge from the stated multiple.
• Equity-based commodity ETFs. These track companies involved in commodity production (e.g. mining firms or energy producers) and provide indirect exposure that can diverge from commodity price moves due to company-specific and equity-market factors.

Each type has different risk and return characteristics. For example, physical gold ETFs/ETPs typically track the metal’s price more closely (minus fees and any currency effects), while futures-based oil products can be more volatile and may lag spot over time depending on market structure.

• Diversified exposure
• Lower fees than actively managed funds
• Liquidity (they trade throughout the day like shares, though overall liquidity depends on the liquidity of the underlying assets)
• Transparency, as holdings are often published frequently

You can invest in a single-commodity ETF/ETP (e.g. silver) or a broad basket covering multiple sectors (e.g. a diversified commodities index fund).

Imagine you want exposure to gold, but you do not want to store bullion at home. A physical gold ETF/ETP lets you buy shares in a vehicle that holds gold in secure vaults. If the price of gold rises by 5%, the fund price will usually move in the same direction, though not necessarily by the exact amount due to fees, bid-ask spreads, tracking differences and, where relevant, currency moves.

Now consider an oil ETF/ETP that uses futures contracts instead of holding barrels of crude. Suppose oil is trading at $80 per barrel today, but futures contracts for delivery in six months are priced at $85 (a situation known as contango). Even if spot oil prices rise slightly, the product’s performance may lag because it has to keep rolling into those higher-priced futures. This means futures-based products can behave differently from the underlying commodity — sometimes delivering lower returns in prolonged contango, and occasionally higher returns in sustained backwardation.

• Commodity futures
• Commodity-focused stocks
• Physical commodities
• Other funds and derivatives

Because they are actively managed, mutual funds tend to come with higher fees than ETFs. However, they may appeal to investors who want a more hands-off approach, with professional managers making decisions based on market conditions. Some mutual funds are highly specialised — focusing solely on agriculture, precious metals or energy — while others are broad and diversified.

1. Diversification
   A single ETF or fund can give you exposure to multiple commodities or sectors.
2. Liquidity
   With ETFs especially, you can buy or sell during market hours, though overall liquidity depends on the liquidity of the underlying assets.
3. Lower capital requirements
   You can take fully funded exposure without posting margin as you would for a futures position.
4. Risk management
   Funds may spread risk across multiple assets or use hedging strategies.

• Tracking difference. Funds that use futures may not match spot-price moves due to contract roll gains/losses, collateral yields and fees.
• Management fees. Especially in mutual funds, fees can reduce returns over time.
• No control over individual holdings. You will not be able to choose which contracts or companies are included.
• Exposure limits. Some funds cap exposure to individual commodities and may be subject to exchange position limits, which can constrain allocations.
• Currency risk. Many commodity funds gain exposure to assets priced in US dollars, so exchange-rate moves can amplify or offset local-currency returns.

For many investors, especially beginners, these tools can provide a straightforward way to add commodities to a portfolio without diving into the complexities of direct trading.

How to evaluate commodity investments

Before investing in any asset — especially one as dynamic and diverse as commodities — it’s essential to do your homework. Commodity markets can offer powerful opportunities, but they come with unique risks and complexities. Knowing how to evaluate your options will help you make more informed decisions, manage risk, and better align your portfolio with your financial goals.

So, how can you evaluate commodity investments effectively?

1. What’s your main goal? Are you looking to hedge against inflation? Diversify your equity-heavy portfolio? Generate short-term trading profits?
2. What’s your risk tolerance? Some commodities are more volatile than others. Are you comfortable with big price swings?
3. What’s your investment timeline? Are you investing for the long term or looking for tactical, short-term opportunities?

The answers to these questions will guide your choice of commodity, product type (e.g. ETF vs futures), and trading strategy.

Commodity markets don’t move in isolation. They’re heavily influenced by global trends — economic, political, environmental, and even cultural.

• Global supply and demand. Look at production levels, consumption patterns, and stockpiles.
• Macroeconomic indicators. Growth forecasts, interest rate decisions, and inflation data can all influence commodity prices.
• Geopolitical risk. Conflict, sanctions, and trade disputes can quickly affect supply chains and pricing.
• Currency fluctuations. Most commodities are priced in US dollars, so shifts in the value of the dollar can impact prices globally.
• Seasonality. Particularly in agricultural commodities, where planting and harvesting cycles affect supply.
• Technological trends. For example, increased electric vehicle adoption could influence demand for metals like lithium and nickel.

By keeping an eye on these broader themes, you’ll have a clearer view of what might be driving prices — and whether a given commodity is likely to rise or fall in the short or long term.

Just like with stocks and currencies, commodities can be analysed using two main approaches: fundamental analysis and technical analysis.

• Global supply and production figures
• Weather events or natural disasters
• Inventory levels (especially for oil, gas, and grains)
• Export data and government policy
• Shifts in consumer or industrial demand

This type of analysis is particularly useful for longer-term investment decisions and for understanding underlying price drivers.

• Moving averages
• Relative strength index (RSI)
• Bollinger Bands
• Support and resistance levels
• Fibonacci retracement levels

Technical analysis is most commonly used by short-term traders, especially in futures markets, where timing is crucial.

Using both approaches together can provide a more complete picture — helping you identify opportunities while avoiding emotional decisions.

• Liquidity. How easy is it to enter and exit your position? Some ETFs and futures contracts trade heavily, while others may be harder to move without affecting price.
• Costs and fees. ETFs may have low expense ratios, while mutual funds and futures trading often come with higher management or transaction costs.
• Tax treatment. Different commodities and investment vehicles are taxed differently depending on your jurisdiction. For example, profits from physical gold may be taxed differently than those from ETFs or company shares.

As always, it’s worth seeking professional advice if you're unsure.

Building a balanced portfolio with commodities

Commodities are more than just raw materials, they’re essential building blocks of the global economy. From the oil that fuels industry to the wheat that feeds nations, these real-world assets represent both opportunity and risk in the financial markets.

For modern investors, commodities can play a valuable role in a well-rounded portfolio.

• Diversification. Commodities often move independently of stocks and bonds, helping to reduce overall portfolio volatility.
• Inflation protection. Tangible assets like gold, oil, and agricultural goods often hold their value when inflation rises.
• Tactical opportunity. Volatile by nature, commodity prices can offer short-term trading potential for experienced investors.
• Exposure to global trends. Investing in commodities is a way to gain insight into, and potentially benefit from, macroeconomic shifts, technological changes, and supply chain disruptions.

There’s no single "correct" way to invest in commodities. It depends on your goals, experience, and risk appetite.

• New to investing? Consider a diversified commodity ETF to gain broad exposure without taking on too much risk.
• Looking for stability? Gold or silver ETFs may help hedge against inflation and market stress.
• Seeking growth? Energy or industrial metal-focused funds may benefit from global infrastructure spending or economic recovery.
• Want to be more active? Learn about futures contracts or short-term trading strategies, but be mindful of leverage and risk.

Whatever your approach, it’s worth viewing commodities as a complement, not a replacement, for more traditional investments like shares, bonds, or property.

Commodities investing doesn’t have to be intimidating. With the right guidance and tools, it can become a valuable part of your long-term financial plan, offering protection, diversity, and even excitement along the way.