[Part 37] What is Commodity Investment? The Meaning of Investing in Gold and Crude Oil
Click here for the previous article ↓
What is Commodity Investment? The Meaning of Investing in Gold and Crude Oil
In the previous two articles, we explained “financial products” such as ETFs and investment trusts. Here, we will shift our perspective slightly to explain an investment target called “commodities,” which have different characteristics from stocks and bonds.
“I hear about investing in gold, but what does that actually mean?” “What is the point of investing in crude oil?”—we will organize the basics of commodity investment while answering these questions.
Chapter 1: What are Commodities: Investing in “Things” Themselves
Commodities refer to “goods,” and in the investment world, they refer to physical “things” such as gold, silver, crude oil, and agricultural products (soybeans, corn, etc.).
Unlike the major assets of “stocks, bonds, real estate, and cash” explained in Part 31, commodities have a major characteristic: they lack a “mechanism to generate revenue” such as corporate earnings or interest. Stocks generate dividends and bonds generate interest, but a gold bar itself does not generate any interest or dividends even if you hold it. Commodity investment is a mechanism where profits or losses are generated solely by “price fluctuations of the commodity itself”.
Chapter 2: Representative Commodities
Gold
A representative precious metal and the most familiar commodity for individual investors. In addition to demand for jewelry and industrial use, it is held by investors around the world due to its aspect as a “safe asset,” which will be described later.
Crude Oil
A representative energy resource, known for its price fluctuating significantly due to trends in the global economy, the political situation in oil-producing countries, and the balance of supply and demand.
Agricultural Products (soybeans, corn, etc.)
These are commodities that are easily affected by weather, harvest yields, and international situations, and their price fluctuation factors are also unique.
Chapter 3: Why is there a meaning to investing in gold?
Among the many commodities, “gold” is particularly noteworthy to individual investors. The reason lies in the following unique properties that gold possesses.
Reason 1: It has value as a “real asset”
Stocks and bonds have their value supported by the credit of the issuer (company or country), but gold is a “real asset” that has long been recognized as having universal value in itself. Since there is no issuer, it has the characteristic that its value is not directly influenced by the performance or financial situation of a specific company or country.
Reason 2: It tends to move differently from stocks and bonds
Gold is considered to have a tendency to be bought as a “safe asset” in unstable situations where the stock market falls significantly. This is because when investors feel anxious, they tend to move funds from risk assets like stocks to gold, which is considered to have relatively stable value. The phrase “gold in times of emergency” was born from this background (we will explain this point in more detail next time).
In light of the concept of “diversification” explained in Part 31, there is a school of thought that combining assets that move differently from stocks and bonds can be expected to have the effect of making the price movements of the entire portfolio more stable.
Reason 3: It is sometimes discussed as a hedge against inflation
As explained in Part 2, inflation reduces the real value of money. Gold is historically considered to be a store of value that is easily maintained or likely to rise during inflationary periods, and it is sometimes discussed as a form of hedge against inflation. However, this is not an absolute rule, and there are certainly phases where gold prices fall.
Chapter 4: Points to Note for Commodity Investment
Point 1: It does not generate dividends or interest
As mentioned above, commodities themselves do not generate income. The fact that no profit is generated unless the price rises is a major difference from stocks and bonds.
Point 2: The factors behind price fluctuations are different from those of stocks
The prices of crude oil and agricultural products fluctuate significantly due to factors different from corporate performance, such as weather, geopolitical risks, and supply-demand balance. If you invest without understanding the mechanism of these price movements, you may be confused by unexpected price changes.
Point 3: It is not necessarily easy for individuals to hold them directly
While there are ways to directly purchase and store physical gold (bars or coins), this involves storage costs and theft risks. Among the investment trusts and ETFs explained in Part 16 and Part 17, there are products that track the prices of gold and other commodities, and it is possible to invest indirectly in small amounts through these products.
Q&A: Answering Common Questions
Q. What percentage of my assets should be in commodities?
A. While it depends on an individual’s perspective and situation, because commodities do not generate dividends or interest, it is common to use them by incorporating a small amount into a portfolio centered on stocks and bonds, rather than setting them as the “core” of asset formation.
Q. Should beginners also consider commodities other than gold?
A. The factors behind price movements for crude oil and agricultural products are more complex than for gold, and they tend to have larger volatility. It is better to first get a feel for commodity investment through investment trusts or ETFs that include gold.
Q. Can I purchase commodities in a NISA account?
A. Some ETFs that track gold or commodities may be eligible for the growth investment quota. However, commodities are generally not included in the products eligible for the installment investment quota.
Summary: Action Plan You Can Start Today
Commodities are a unique investment target with properties different from stocks and bonds. Let’s review the key points from this session.
-
Commodities are targets for investing in “things” themselves, such as gold and crude oil, and do not generate dividends or interest
-
As a “real asset,” gold tends to have price movements different from stocks and bonds, and diversification effects can sometimes be expected
-
Commodities are generally used by incorporating them into a portion of a portfolio, rather than as the core of the assets
As a small step you can take starting today, please try the following.
-
Action 1: Check whether commodities such as gold are included in the investment trusts you hold
-
Action 2: Research what kind of events have caused gold prices to fluctuate significantly in the past
-
Action 3: Research what kind of investment trusts and ETFs are linked to commodities
Next time, we will delve deeper into the topic of “Is ‘gold in times of crisis’ true? The effect of adding a little gold to your portfolio.” Stay tuned.