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Which Is a Commodity Someone Might Invest in for Growth

Which is a commodity someone might invest in to take advantage of the higher prices? Learm more about today’s market.
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This article was originally published by Investment U

The S&P 500 (SPX) just finished its worst start to a year in over 50 years. On the other hand, although commodities are down this month, they still lead the market in 2022. The outperformance is leading investors to ask, which is a commodity someone might invest in for growth this year?

The big headline rocking the stock market is the rising cost of energy. For example, Natural Gas prices are still up over 55% from last year. And oil prices remain above $105 a barrel, up 45% from 2021.

Meanwhile, recession fears are halting the brakes on the commodity market run. After gaining 48% in 2022, the Invesco Commodity Index (DBC) is down over 12% from its highs.

Supply and demand drive commodity prices. So, prices often go through violent swings when there is an imbalance. The imbalance is a major part of the reason commodities like gas and oil are outperforming the market.

The Russia/Ukraine war is impacting global energy prices as many resources come from the region. For example, Russia is the second-largest global supplier of crude oil.

With this in mind, which is a commodity someone might invest in to take advantage of the higher prices? Keep reading to learn more about these investments and what to expect from the market next.

Which Is a Commodity Someone Might Invest In?

Many commodity prices are falling drastically this month. As a result, investors are speculating on what will happen next. Will we bounce? Or has the market topped?

For one thing, supply constraints are still there. It can take years to increase output in some instances. But, with the fed raising interest rates, can it balance demand? Higher rates are already cooling prices.

For example, the core PCE price index fell for the third straight month in May. The index is the Fed’s preferred measure of inflation and excludes energy and food.

Commodities are often split into three categories.

  • Metals
  • Energy &
  • Agriculture

Let’s take a closer look at each group to see why prices are up in the first place and if a pullback is warranted.

3. Metals

When you think of investing in metals, the first thing that comes to mind is usually gold or silver. And these can be great investments during difficult times. For example, geopolitical tension, high inflation, and economic uncertainty often lead investors to buy precious metals.

Precious metals include gold, silver, and platinum. Gold, in particular, is seen as a “safe haven” asset. To illustrate, the SPDR Gold Trust (NYSE: GLD) is flat in 2022 compared to many holdings down over 20%.

But precious metals are only a part of the metals group. Industrial metals, on the other hand, are used to produce goods. A few examples include:

  • Copper
  • Steel
  • Aluminum &
  • Lead

The most important thing to know about metals is what drives demand. For instance, industrial metals see higher demand when economic activity rises. If construction, automotive, and manufacturing picks up, more metals are needed to match the higher output.

At the same time, investors pile into precious metals to protect returns during stressful times. A great way to view the relationship is through the copper-to-gold ratio.

Copper is widely viewed as one of the most used industrial metals. Therefore, higher copper prices often means rising global economic activity.

After surging during the pandemic, the ratio looks to be breaking major resistance. The fallout could be a sign of slowing activity. For one thing, copper is often more sensitive to changes in interest rates.

2. Agriculture

Have you noticed higher prices at the grocery store? Everyday food items like bread and eggs increased significantly this year.

Part of the reason for this is the higher energy costs. If energy goes up, businesses pay more for gasoline and electricity. Not only that but transporting the items is more expensive.

As a result, higher prices get passed on to consumers. For this reason, we saw agriculture prices soar earlier this year.

Investors primarily focus on three goods.

  • Wheat
  • Corn &
  • Rice

The three make up two-thirds of the world’s caloric intake. Russia and Ukraine account for over a quarter of the world’s wheat supply. Though prices initially soared, they are currently down significantly from their highs.

For one thing, increasing crop supply is easier than increasing energy production. Higher grain prices are an incentive for farmers to plant more. In fact, corn is again the top crop in the U.S as farmers look to fill the supply gap and take advantage of higher prices.

Keep reading to discover which is a commodity someone might invest in this year.

1. Energy

Energy has been the star of the show in 2022. In fact, energy is the only sector with positive returns this year. The Energy Select SPDR Fund (NYSE: XLE) soared, gaining over 65% as the war in Ukraine threatened the energy supply.

Yet XLE stock is down over 20% from its highs last month. With this in mind, energy hit overbought on the Relative Strength Index (RSI) two days before falling from a multi-year high.

Energy was due for a pullback regardless. That said, there are a few factors at work here.

  1. Supply is still a concern
  2. Increasing supply can take several years
  3. Energy prices are still much higher than last year

Natural gas futures (NG1) are up over 55%, hitting a multi-year support level. And heating oil is up over 80%.

Furthermore, Covid lockdowns in China likely dampened demand this past quarter. Will we see another run with China loosening restrictions? Or is the inflation trade over?

For one thing, demand is likely to pick back up at some point. As long as the war in Ukraine is ongoing, supply is a global concern. Though prices have cooled recently, I wouldn’t be surprised to see another rally later this year as winter demand heats up.

With this in mind, higher energy prices are boosting company profits. Check out a few top oil stocks to buy to take advantage of higher prices.

Keep Reading This Article and Find Out the Top 2 Commodities to Buy

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