Commodities Guide — Gold, Oil & Agriculture

What Are Commodities?

Commodities are raw materials and primary goods — the physical inputs of the global economy. They fall into four broad groups:

• Precious Metals — gold, silver
• Energy — crude oil, natural gas
• Industrial Metals — copper, aluminum
• Agriculture — wheat, corn, soybeans

Prices are driven primarily by supply/demand fundamentals, weather, geopolitics, the US dollar, and interest rates — not by corporate earnings. This is why commodities tend to behave differently from stocks in a portfolio (Portfolio Strategy).

Why Commodities Move Differently from Stocks

Stocks reflect a market's judgment of future corporate earnings. Commodities reflect the physical balance of supply and demand for a specific material right now and in the near future. That disconnect is what gives commodities their diversification potential.

Inflation hedge is the other key idea: when the purchasing power of money falls, the dollar price of real goods tends to rise. Holding some commodities can offset some of that purchasing-power erosion. But “hedge” does not mean “always profitable.” Timing matters, and commodities can lose value for extended periods.

Gold

Gold pays no interest or dividends. Its opportunity cost is determined by real interest rates (nominal rates minus inflation). When real rates are low or negative, gold becomes relatively attractive. When real rates rise sharply, gold typically underperforms.

Key ETFs: GLD and IAU (both backed by physical gold). Gold mining stocks like GDX add operational and management risk on top of gold-price exposure.

Oil & Energy

WTI and Brent crude are the two main benchmark oil prices. Rising oil prices feed directly into transportation, aviation, and chemical costs — making them a significant input for CPI and inflation expectations. Key supply variables include OPEC+ production decisions, Middle East geopolitics, and US shale output.

ETF examples: USO (futures-based crude oil — watch roll costs for long-term holders); XLE (energy sector equities — different from oil itself).

Roll cost explained: Futures contracts expire, so ETFs must continuously sell near-term contracts and buy further-dated ones. If near-term prices are below future prices (contango), this rolling process creates a hidden drag. Long-term holders of USO have historically underperformed the spot oil price for this reason.

Agriculture & Industrial Metals

Agricultural commodities are highly sensitive to weather patterns, crop yields, and export restrictions. Copper is often called the “economic thermometer” because construction, electrical infrastructure, and EV manufacturing all demand it heavily — when copper rises, it often signals broad economic expansion.

Diversified commodity baskets: DBC or PDBC (lower tax drag version of DBC). For most beginners, the core remains broad equity ETFs; commodities work best as a small satellite of roughly 5% or less.

Stocks, Bonds & Commodities — One-Frame Summary

Common Mistakes