Does It Make Sense To Invest In Commodities During A War?

This article was contributed to us by Deepak Khanna, Head of Wealth & Trading at Revolut.

We know that inflation is closely linked to supply chain challenges, and the war in Ukraine will most definitely have an impact on how food, energy, raw materials and precious metals are moved around the world.

If you’re starting to get curious about commodities, you have found yourself at the right place.

What Is A Commodity?

A commodity is a basic good used in the production of other goods and services. Commodities are traded on a marketplace for buying, selling, and trading raw materials or primary products.

Why Are So Many Commodities Impacted During This War?

Europe receives 35 – 40% of its natural-gas supply and 25% of its oil from Russia. Most gas from Russia to Europe flows through a pipeline that runs directly through Ukraine. Russia is the world’s second largest exporter of crude oil and produced around 11% of total world oil in 2020. While the current sanctions announced by the USA and Europe have not directly impacted the gas and oil sectors, concerns of disruption have led to an immediate increase in energy prices.

Russia and Ukraine together account for roughly 29% of the global wheat export market. Ukraine is one of the largest suppliers of corn to China. Apart from this, Ukraine produces barley and rye that most of Europe rely on.

Russia is the world’s third-largest producer of gold and a significant exporter of platinum, copper and nickel. Russian companies are a major producers of palladium, mining 40% of global production. Palladium, platinum and nickel are used in vehicle components, for example, palladium is used as a catalytic converter to clean car exhaust fumes and nickel is used in electric vehicle batteries.

So, What Happens When We Buy Commodities?

For the majority of us, we are what the market calls “speculators” — traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements. We are not actually buying or selling the actual physical commodity. Meaning, if you intend to invest in gold commodities, you are trading in gold exposure, not buying and selling an actual gold bar.

And Why Are People So Interested In Commodities Right Now?

As mentioned above, the war has impacted the movements of many raw materials, leading to an increase in prices in many sectors. Commodity prices typically rise when inflation accelerates, which is why investors often flock to them for their protection during times of increased inflation—particularly unexpected inflation.

Many investors have, in particular, taken a shine to gold. Gold boasts some of the highest liquidity in the commodity markets and has more often than not increased in value over time.

Does This Mean I Should Invest In Gold?

Russia’s military operations in Ukraine and rising geo-political tensions, have led to  “fear” trade with increased investments in commodities like gold. In such times, gold has often been considered as a hedge against inflation and stands to benefit as investors rebalance from riskier asset classes to more defensive asset classes.

Why Don’t I Just Buy Lots Of Gold Jewellery?

Buying physical gold comes with high sale costs, and you can’t be certain about the purity of the gold. Storing, transporting, and selling physical gold is also a logistical nightmare. The cheaper and easier way to invest in gold is to buy it through an exchange traded fund (ETF) or a mutual fund.

ETFs look to bridge the middle ground between large investments and individual investors who don’t have that kind of capital. In some cases, ETFs will have their own physical commodities and offer fractional shares of this commodity to investors that will be of a certain amount.

How Can I Get Started?

Revolut Singapore recently launched Commodities in our app. Through Commodities, you can buy or sell gold/silver exposure from as low as S$1, or using any of our 28+ in-app currencies.  Investment is backed by real, physical assets stored in the vault of a member of the London Bullion Market Association.

You can also set up price alerts and enable auto-exchange so that the Revolut app automatically buys or sells gold/silver when the market price matches your target price. You’ll also be able to transfer gold and silver exposure to other Revolut customers and save your spare change in these precious metals. If you’re on Revolut’s Metal plan, you can also choose to receive your 1% card-spend cashback in gold or silver.

If you are interested, you can sign up for the Revolut card here.

Do note that this article should not be taken as financial advice. You should always speak with your own financial advisor before making any investment decision. If you do invest in precious metals through the Revolut app, remember that your capital is at risk. To learn more about Revolut’s Commodities feature, click here.

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