Commodities like gold are often used to spread risk because their price tends to move at different times to other types of investments. But investing in commodities is not low risk.
Commodities are goods or materials bought and sold freely as an article of commerce. Examples include agricultural products, fuels, and metals such as gold and silver.
You can buy some commodities (like gold) direct from a dealer, or you can invest in commodities via a managed fund. You can also buy derivatives or shares of listed commodity-producing companies (for example a company that produces oil or crops).
Wild price swings and the potential for scams mean commodity investing may be best done through managed funds or other more complex financial products, such as futures and options.
Things to look out for:
It may be years before you make a profit
Direct commodity investments don’t pay interest or dividends. You can only make money if the commodity increases in value and you’re able to sell for more than you paid. Prices can be subject to wild price swings so it may be many years before you get the price you want. There will also be costs to consider, such as storage and insurance and you may have to pay tax if a commodity is sold for a profit.
It can be hard to predict the future price of commodities
Gold is usually priced in US dollars, so its value is affected by movements in currency exchange rates as well as international demand. This can help you spread risk because prices tend to move at different times to other types of investments. But it also makes it harder to predict what the future price might be.
It may be safer to work with local dealers
If you’re buying a commodity directly, make sure you know where it comes from. In the case of gold, certain dealers are recognised around the world. Using a local, reputable dealer may make it easier to resolve any issues and to sell the commodity.
You could get scammed
We are aware of scammers selling commodities like gold. Be wary of businesses not based in New Zealand. Scammers commonly try to ‘sell’ gold or other commodities they promise to keep safe for investors. If you’re buying gold, ask yourself how you know that same bar of gold hasn’t been sold to other investors as well?