‘How to Invest’ is a series of articles guiding readers through the basics of investing in different assets. See also: The risks of leaving money on deposit, how to invest in shares, how to invest in a fund and how to invest in bonds. Next week: property.
Filling up your car with fuel on the forecourt, doing your weekly shop, buying a gold necklace for a Christmas present. Commodities are all around us, and price movements in them can have a real impact on our daily lives – as we are finding with pump prices in the current Gulf conflict.
Typically, commodities cover most goods and raw materials – so agricultural goods like wheat and coffee; fuel, such as oil and natural gas; and metals like silver and gold.
This week, we’re looking at how you can invest in them, how much you should allocate and why they just might be the new bonds.
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Why invest in commodities?
In the past, commodities may have been for those investors who were looking to spread their substantial resources over a greater variety of assets, or who were attracted by the safe haven qualities of gold. For everyone else, the traditional equity/bond portfolio probably sufficed.
“If your time horizon is long and your risk appetite is strong and you have financial resilience, you will be perfectly fine having 80 per cent plus [of your portfolio] in the stock market,” says Ralph Benson, co-founder of financial advisory firm, Moneycube. “You don’t need to care [about short-term volatility] if your time horizon is counted in decades.”
However, things in the investment world are changing and, particularly of late, exposure to commodities can help protect your portfolio in the event of a slump in stock markets.
“There was a time when a 60:40 portfolio (between equities and bonds) was all great,” says Benson.
However, as the International Monetary Fund (IMF) recently noted, since the pandemic, and in a time of inflation, bonds and equities have increasingly moved in the same direction. That means the ability of bonds to offer a hedge against the risk in your stock portfolio has lessened.
[ How to invest in shares: Pros, cons and the smart way to keep costs downOpens in new window ]
“That’s what makes my job hard at the moment,” says Benson. “Bonds may no longer be helpful to do the job they were doing.”
“This means that you may need to introduce non-correlated or less correlated exposures to balance your portfolio – which is where commodities come in. They are a little bit disconnected from wider asset prices, and that’s where the protection lies,” says Benson.
So, holding assets that drive inflation, such as commodities, can offer inflation protection. If food prices go up, you’d expect food-linked commodity prices to rise also.
But how much of your portfolio should be in commodities?
In general, Benson says people could allocate somewhere between 10 and 12.5 per cent of their portfolio to commodities, possibly going up to 20 per cent if you include other alternatives such as infrastructure.
Commodities don’t offer an income, unlike coupons from bonds or dividends from shares. And from a risk perspective, Benson says commodity pricing can be “just as volatile, if not more so” than shares in companies. Take a look at the rise and recent fall of gold, as an example.
There can also be a currency risk associated with commodities, as most will be denominated in US dollars, as well as political risks, particularly in relation to energy.
How can I invest?
There are a number of ways to invest in commodities.
First of all, you can buy the physical asset. Goldcore, the Dublin-based member of the London Bullion Market Association, sells silver and gold coins and bars for example, which can be delivered to you by a secure and insured courier or Goldcore can store it for you in its vault.
A 1oz gold bar was selling for €4,121 on March 31st, while 20 Silver American Eagle coins were €1,746.
Given the recent rapid rise in the price of both gold and silver – before the recent pullback – Goldcore has been rather busy of late.
Stephen Flood, chairman and co-founder of the business, says demand is up about eight to 10 times compared to this time last year.
“Typically when something bad happens, people run into the dollar; instead they ran into precious metals, creating a huge spike in demand,” he says.
If you don’t want to – or can’t afford to – buy a bar/coin etc, you can buy unallocated gold, which makes you a part-owner as part of a pool with other investors. You can also put upwards of €100 a month into a Goldsaver account.
But why physical gold?
“People want something they can actually own, not something that only exists on a screen,” says Flood. “In a crisis, investors don’t want exposure, they want certainty, and that’s what physical gold provides.”
As Benson notes, while you can keep gold bars under your bed if so inclined, unadvisable as it may be, with most commodities, it is not feasible for retail investors to own the actual asset.
Gold isn’t really an investment in the traditional sense; it’s a form of financial insurance
— Ralph Benson, Moneycube
As an alternative, they can invest in a diversified fund via an exchange-traded fund (ETF) or exchange-traded commodity fund (ETC). The latter tracks individual commodities or a basket of commodities, and moves based on the price of the underlying commodities.
These offer a liquid and easy way of investing in commodities, and you can buy them through a broker.
“It is lower cost, easier to get in and out off, and avoids too much complicated thinking,” says Benson of the fund route.
You’ll have many options on this front. One is the iShares Physical Gold ETC, which offers targeted exposure to the gold spot price. Or you could look for a thematic fund, such as the Future of Food ETF.
Another option is to track a basket of commodities. Benson suggests the Invesco Bloomberg Commodity ETF. Its biggest holdings are in energy (about 32 per cent), grains (about 20 per cent) and precious metals (about 20 per cent). It has an annual fee of 0.19 per cent.
You can also trade an “exposure” to gold via Revolut. This product is backed up by real, physical gold. Or you can invest in commodities via a life-wrapped fund, such as the Indexed Commodities Fund from Zurich Life.
Buying shares in commodity-linked companies, such as Exxon Mobil, Shell or Corteva, is another common route, although the concentrated nature of the investment on the fortunes of a single company makes it inherently riskier.
Safe haven?
For some investors, gold is the commodity closest to offering investors a safe haven in times of global market stress. Benson, however, says he “doesn’t put too much store in that”, pointing to a significant sell-off in recent weeks.
“It’s not as if these assets can’t incur losses,” he says, adding that the risk for people looking to buy into precious metals now is that they are doing so after a year and a half of very solid gains and are doing so at high prices.
For Flood, however, those who tend to put money into gold do so for different reasons.
“Gold isn’t really an investment in the traditional sense; it’s a form of financial insurance,” he says, adding that despite recent stellar growth (before the fall back), it’s not about chasing gains.
“You don’t buy gold for income or yield, you buy it because it stands outside the financial system,” he says.
Cost of investment
As there are various ways to invest in commodities, there are also various cost structures applicable.
One of the cheapest routes is likely to be investing via an ETF or an ETC – the aforementioned iShares Physical Gold ETC, for example, has a 0.12 per cent annual management fee although you will have to factor in brokerage costs also to buy or sell. Similarly, the Invesco ETF has an annual charge or total expense ration (TER) of 0.19 per cent.
Buying shares will mean no annual charges but it does mean stockbroker fees when you buy and sell which we covered in this series here a few weeks ago.
A life-wrapped fund will attract higher charges, likely north of 1 per cent, as well as the life insurance levy of 1 per cent.
If you like holding a tangible asset, then acquiring silver or gold might appeal. However, you may need to factor in delivery costs, as well as storage costs if you don’t want to keep it at home.
When it comes to holding gold, Flood says it is roughly “half and half” between those who opt to keep it themselves and those who pay for professional storage.
Goldcore stores the gold on a segregated allocated basis, which means that it is held separately from the holdings of other clients in vaults around the world, including in Ireland and Switzerland.
Costs will depend on how much you’re storing, ranging from 1 per cent annually fully insured, down to half a per cent a year, fully insured as well as accessible.
If you’re a regular saver into gold, you can expect to pay a bit for buying smaller amounts, with Flood saying there’s a premium on the Goldsaver account of about 5 per cent.
If you want to invest in an exposure to gold via Revolut, standard customers will pay fees of 0.99 per cent/min fee of €1, whichever is higher, plus 1 per cent/0.5 per cent foreign exchange fair usage.
Options for exiting
This will depend on how you have chosen to invest. If you have bought an ETF or fund, for example, it is a matter of contacting your broker or the life company, etc and submitting a sell order.
Similarly with shares, it is quick and easy to exit.
If you have bought a physical commodity, such as gold or silver coins, for example, you should be able to sell as you wish.
“It’s extremely liquid,” says Flood, of gold, but adds that silver is less so. Goldcore’s website is open for trading 12 hours a day. There are some restrictions on the Goldsaver account however, as you can only buy once a month, and sell once a month.
“By limiting when you can sell, people actually build a meaningful nest-egg instead of dipping in and out,” says Flood.
What tax will I pay?
Again, your tax exposure will depend on how you decide to invest in commodities. If you go down the life-wrapped/ETF route for example, you will be looking at the exit tax regime – 38 per cent tax on gains, and deemed disposal every eight years.
If, however, you opt for an ETC and it is traded as a debt security, this will be subject to the capital gains tax (CGT) regime, which means tax of 33 per cent on profits. It also means losses can be carried forward – unlike with an ETF or a life-wrapped product – and the first €1,270 of crystallised gains – ie gains made on selling the asset – in a tax year are exempt.
If you invest in shares of commodity producers, you will also be subject to the CGT regime.
That is also the case it you choose exposure to gold via Revolut or if you buy the physical commodity.
