Commodities

‘Commodities’ is a broad investment term that covers a wide variety of raw materials. In investment markets, commodities can refer to energy, industrial, or agricultural goods. The defining characteristic of a commodity is that it is a ‘raw material’. That is, it is produced in its raw form, before any other value-adding process changes its composition. In this way, copper, for example, produced in Australia, is exactly the same as copper produced in Russia. Copper is the raw material. Common examples of commodities include oil, gold, copper, zinc, nickel, iron ore and coal. Wheat and coffee are examples of agricultural commodities.

So what are commodities?

Australia is one of the largest commodity producers in the world. It is the largest producer of iron ore and coal in the world. It is the third largest producer of gold, and a significant producer of ‘base metals’, including copper, zinc, and nickel. Thanks to the construction of a number of liquid natural gas (LNG) plants in Queensland, completed in 2015/16, Australia has also become one of the largest exporters of natural gas in the world. This means that a large part of the Aussie market is made up of commodity, or ‘resource’, stocks.

What are the best commodities to buy?

While companies like BHP Billiton Ltd [ASX:BHP] and Rio Tinto Ltd [ASX:RIO] are well known, there are hundreds of smaller resource companies, with many of these involved in exploration and development. That is, these companies are not actually making any money, as they are looking for a resource or developing one they previously discovered. This means there are huge opportunities for gains in this sector. If you can find a stock before it finds the mother lode, you could make huge returns. But there are also significant risks. Many companies spend millions looking for a valuable resource — one which they may never find. Investing in commodities isn’t for everyone, but it can be an extremely exciting and lucrative sector to get involved in.

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Money Morning Australia