Can you strike gold with commodities? Ukraine war sparks soaring prices

The war in Ukraine has caused chaos in the commodity markets, with soaring prices and volatile swings.

Russia is the second-largest exporter of oil and the third-biggest producer of nickel, while both Russia and Ukraine ship more than 50 million tonnes of wheat each year.

Disruption from the war has seen oil rise 50 per cent since January, with wheat, nickel and gold up 40 per cent, 72 per cent and 7 per cent respectively in the same period.

Disruption from the war in Ukraine has seen oil prices up 50% since January with other commodities like gold also rising

According to market analysts at financial data firm Refinitiv, this year will see the sharpest rise in commodities since the 1970s — another period associated with high inflation. 

If the West moves to boycott Russian oil, prices could spike even further: something which has made markets hyper-sensitive in recent weeks.

Rising commodities are typically seen as bad news for the economy, as high prices dent profit margins and weaken investment. 

But what role should commodities play in your portfolio, and can you ever cash in on price spikes?

Oil prices could spike further 

Given its importance to the world economy, most investors will have some exposure to oil in their portfolio.

The most common route is to purchase shares in those companies that make their money through oil, like BP and Shell.

But investors looking for a more direct route can purchase something called an ETC (exchange-traded commodity).

Most investors will have some exposure to oil in their portfolio given its importance to the economy

Just as index funds match the price of a particular equity index (for example, the FTSE 250), ETCs track the price of a particular commodity. 

Europe’s largest oil ETC, WisdomTree WTI Crude Oil, has experienced a flurry of interest in the past year, as investors bet on the black gold.

Over the past five years, the ETC has risen 45.3 per cent – making a £10,000 investment worth £14,530.

Before purchasing an ETC, retail investors should be conscious of the fundamental differences between commodities and equities.

As commodities don’t make profits, they don’t pay a dividend. And there’s no expectation that they will grow in value over time.

What commodities can do, though, is provide a portfolio hedge: ensuring that a small part of your portfolio will benefit in a tumultuous period.

Generally, most experts recommend having about 5 per cent of your portfolio in defensive assets, with gold typically being the most popular.

Is gold a safe bet?

Gold has a crucial difference from most other commodities in that it’s easy enough to buy it directly.

For years, investors have purchased gold ‘sovereigns’ — including directly from the Royal Mint — as a potential insurance policy against inflation.

The rise of online investing has given investors other ways to gain direct exposure to gold.

Gold-based ETFs (exchange-traded funds), such as the popular iShares Gold Strategy ETF, essentially function like an investment fund which tracks the price of gold.

As they are traded on the stock exchange, they have one big advantage over bullion: you can buy and sell them instantly.

As most investors know, gold has performed strongly over the past three years, spiking in 2019 (in anticipation of tighter U.S. monetary policy) and 2020 (when Covid hit).

A £10,000 investment in iShares Gold five years ago would now be worth £14,670.

As is often the case with assets that have performed strongly, investors should be wary of not inadvertently purchasing at the peak.

Recent history has shown that gold rallies are often followed by a slump — which could prove costly for investors.

Agriculture in focus 

With some of the most fertile land in Europe, Ukraine has long been a major wheat grower.

Indeed, the yellow in the Ukrainian flag is meant to represent a field of wheat, with the blue standing for the sky.

Shortages: With some of the most fertile land in Europe, Ukraine has long been a major wheat grower

While it’s possible to include the cereal crop in your portfolio (WisdomTree Wheat ETC), investors may be better off with a broader option like WisdomTree’s Agriculture ETF.

Rather than staking all your money on one commodity, this option allows you to back a range of grains and beans, including wheat, oats and soybeans. 

The ETF has returned 35 per cent over five years, making a £10,000 investment worth £13,500.

It remains a highly specialist option, though, meaning that investors should be sure to do their research.

In demand: Rare earth metals

While gold and silver remain the most valuable commodities, the demand for smartphones, laptops and electric cars has seen a clamour for rare metals.

Many of these metals can be extremely difficult to mine, adding to their price premium.

VanEck’s Rare Earth and Strategic Metals ETF tracks a portfolio of 44 strategic commodities, including cerium, titanium and tungsten. The ETF, launched in January, has risen 10 per cent since.

Bag a basket

For all the buzz around individual commodities, ordinary investors may find the best route is to put a small part of their portfolio — no more than 5 per cent — into a diverse basket of commodities.

Legal & General’s ETF Managers All Commodities UCITS ETF mirrors the Bloomberg Commodity Index: an influential index of different commodities. 

Investors purchasing the ETF will have around 30 per cent of their money in energy, 23 per cent in agriculture, 15 per cent in industrial metals and 20 Investors purchasing the ETF will have around 30 per cent of their money in energy, 23 per cent in agriculture, 15 per cent in industrial metals and 20 pc in precious metals. in precious metals.

A £10,000 investment five years ago would now be worth £16,970.

Crucially, it helps reduce volatility by ensuring your money isn’t riding on any one particular material. 

Should uncertainty continue to play havoc with world markets, it could prove a valuable portfolio hedge.

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