Oil, gold and base metals are a good place to be for commodity investors. In 2018, some organizations, like Weiss Ratings indicated it's the Year of Commodities. This boom resulted from higher movements in such commodities as aluminum, coal, and zinc, which were up 30% in 2017. They are cheap to buy in comparison to equities, as well, giving further cause to add them to your portfolio for future profitable trades.
Inflation is a key driver. It rose to 2.6% in 2016 and 2017, according to the Consumer Price Index (CPI). The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
And the Producer Price Index (PPI), recorded an increase of 0.4% in January 2018, which is considered to be good for the sector. The PPI is a weighted index of prices measured at the wholesale, or producer level.
When the U.S. Dollar declines, that's good news for commodities. In February 2018, it fell to a trade-weighted index of 80, its lowest reading in three years.
Rising prices for gasoline are largely a function of the cost of crude oil. Crude oil is reacting to the laws of supply and demand and tensions in the Middle East. Demand is on the way up because of high growth in China, which has persisted in 2018. World oil demand neared 100 million barrels per day (MBD) for the first time in 2018, according to the American Petroleum Institute (API).
The demand for oil extends well beyond gasoline. Products made from petroleum include plastics, medicines, linoleum, shingles, ink, cosmetics, synthetic fibers, solvents, fertilizer, asphalt and thousands of others. Some of them experienced a lift in 2017, thanks to The Organization of the Petroleum Exporting Countries (OPEC), which controls the petroleum policies of its members and benefited from cutbacks in production by Russia.
The gold market boasts diversity and growth. It's used in jewelry, technology, by central banks and investors giving rise to its market at different times within the global economy. In 2018, prices are rising due to tensions in the Middle East, North Korea, and Iran.
Base metals are common metals used in commercial and industrial applications, like construction and manufacturing. Aluminum, zinc, and copper are good examples and were up 20% at the start to 2018. Growth demands, particularly from China, should see prices continuing to rise. In 2017, base metals were the best-performing commodities sector, with nearly 22% growth.
The Bottom Line
When deciding to invest in commodities, renowned investor Jim Rogers suggests that three key questions be answered: First, what is the current level of world production? Second, what new supply sources are currently coming online? Third, are there potential supplies that are undergoing exploration?
In addition to the commodities mentioned above, other commodities to consider are the other precious metals (platinum, palladium, silver), lithium, cotton, and food products (coffee, corn, oats, wheat, soybeans, sugar). They have all performed relatively well during the past two years, reacting to increased global demand.
There are many ways to invest in commodities, including mutual funds, index funds, exchange-traded funds (ETFs), stocks and futures markets. As with all investment decisions, do your own research or consult with an experienced broker.