Investing Basics: Investing in commodities with investment trusts

 

How investment trusts can provide exposure to the long-term growth drivers for commodities….by Thomas McMahon

 

It may be more than 6,000 years since commodities were first traded but they still sit at the heart of the global economy, with Statista reporting that almost $150 trillion will change hands in 2026, and the global commodity market should continue to grow by 8% a year until 2031.

This includes lots of raw materials which have been central parts of our domestic economy for years, such as the oil and gas heating our homes, and the iron ore used to make steel in ships, planes and buildings. These sorts of uses continue to see growth as poorer countries urbanise and develop modern economies.

But a lot of the growth is coming from the very newest sectors of our economy, including the energy transition, which should steadily see oil and gas superseded. Minerals such as lithium, nickel and cobalt are critical components in battery production, while electricity grids, which form the backbone of the renewable energy transition, will require substantial quantities of copper and aluminium. Iron ore is used to make steel, vast quantities of which are needed to build wind turbines and solar panels.

AI is another key modern trend to which commodities are essential, most notably vast amounts of copper to supply the required power for its data centres. Indeed, AI needs vast amounts of power, which requires investment in energy production and transmission, which requires…, you get it. Meanwhile ongoing geopolitical tensions have shown governments they need to invest in a secure supply of these critical materials. This is why commodities matter to investors.
 

What drives the price of commodities?

 

There’s an old adage in economics: ‘the cure for high prices is high prices’, and this tends to hold true for many commodities. In particular, industrial commodities tend to show cyclical price behaviour. Demand grows when prices are low as new projects look financially attractive, and this leads to higher prices, which means projects can’t generate the same return, and so demand falls and prices fall. With industrial commodities being essential to many industrial businesses, to construction and manufacturing, prices tend to be very sensitive to the overall health of the economy.

That said, the dynamics can vary significantly by the type of commodity. Energy commodities are strongly influenced by economic cycles, but also geopolitical factors. OPEC actively manages oil production to influence prices in the interests of its members. In the aftermath of this year’s war in the Persian Gulf, OPEC may be fracturing, but the political goals of the major oil producers have to be borne in mind, as well as the huge stockpiles kept on hand by the US, China and others.

Precious metals, on the other hand, tend to be driven by different factors. Gold is often seen as a safe haven asset in times of uncertainty, it can be used as an alternative to cash when interest rates are low. It remains a major reserve currency held by central banks, and highly prized as a savings vehicle in India and elsewhere.

Agricultural commodities such as wheat face unique supply and demand dynamics, including adverse weather such as floods or drought, technological advances and government support. They tend not to feature in most commodity funds, which focus on the hard commodities.
 

Why invest in commodities?

 

There are a number of reasons to invest in the commodities sector, which we explore in more detail below.

 

1. Strong drivers of demand

 

Commodities are forecast to enjoy strong secular growth drivers as the critical building blocks in the clean energy transition.

As illustrated in the graph below, showing forecast increase in demand from 2023 to 2030 and 2040 under the Net Zero Emissions (NZE) scenario, the IEA, in its Global Critical Minerals Outlook 2024, is projecting a five-fold increase in demand for lithium from clean energy technologies by 2030 (and a 12-fold increase by 2040), with electric vehicles and battery storage accounting for 90% of total demand. This is accompanied by robust growth in other battery minerals such as nickel, cobalt, manganese and graphite.

 

 

 

Another key driver of growth is the pressing need to upgrade global energy infrastructure. Copper plays a critical role in power transmission networks and clean energy technologies such as solar panels and wind turbines, with the IEA forecasting that copper demand will double by 2030. In addition, rare earth elements are essential for the magnets used in wind turbines and electric motors.

As a result, governments have earmarked substantial funds for investment in low-carbon technologies, including almost $400 billion under the US Inflation Reduction Act (IRA) and €270 billion by the EU.

The rapid expansion of energy-intensive data centres is also expected to drive substantial demand for commodities. On average, processing a ChatGPT query consumes ten times more electricity than a Google search and a recent study warned that the AI industry could consume as much energy as a country the size of the Netherlands by 2027.

This trend has led major technology firms such as Amazon, Alphabet and Microsoft to explore nuclear power solutions, which could boost demand for uranium.

 

2. Persistent supply constraints

 

Supply constraints remain a challenge across the commodities sector, with production limited by factors such as declining ore grades, ageing infrastructure, long lead times for new mines, geopolitical issues and a lack of investment in new capacity.

As illustrated in the following chart, expansionary capital expenditure has fallen significantly over the last decade as mining companies have prioritised debt repayment over new investment, resulting in strong balance sheets and lower leverage compared to historical averages and other sectors.

 

 

 

A lack of shovel-ready projects and a substantial rise in the cost of new projects mean that current supply constraints are likely to persist, which should be supportive of commodity prices going forward. There has also been a notable uptick in M&A activity as mining companies look to acquire assets trading below replacement costs, which may provide a further tailwind for returns.

 

3. Portfolio diversification

 

Commodities provide the opportunity to diversify into a different asset class to equities, bonds and property. Historically, commodities themselves have had a low correlation to equities, meaning that commodities have often outperformed when equities have underperformed.

This low correlation was particularly valuable when bonds and equities fell sharply in 2022. By way of example, investors in BlackRock World Mining (BRWM) would have enjoyed a share price total return of 26% in 2022, compared to a negative return of 38% and 19% in the UK index-linked gilt (using an iShares ETF as a proxy) and S&P 500 indices respectively.

However, while the share prices of mining companies have often displayed a low correlation to broader equity indices, it should be noted that they can be highly correlated at other times.

Commodities can also act as a hedge against inflation as prices generally rise during times of inflation, with commodity prices often included in inflation calculations.

The following chart shows that the broad-based Bloomberg Commodity Index rose when US inflation hit 4% in 2011 and 9% in 2022. Gold has also often performed strongly in times of rising inflation, as seen in the period following the global financial crisis. Given the potential inflationary impact of US tariffs, this could provide a useful protection mechanism for investors.

 

 

 

4. Track record of attractive returns

 

Commodities have historically delivered strong returns over the long term, although they can be volatile over shorter time periods.

The following chart shows the price returns from a selection of commodities and indices. Gold and copper have delivered returns of 887% and 536% respectively, significantly outperforming the returns from the FTSE 100 Index.

 

 

Gold has delivered a particularly strong performance in recent years, reaching record highs in early 2026 amid macroeconomic uncertainty and escalating geopolitical tensions. A key driver has been increased purchasing by central banks, particularly in China, as they seek to reduce their reliance on US dollar reserves.
 

Why invest in commodities via investment trusts?

 

It’s worth saying at the outset that it’s difficult to invest directly in physical commodities other than precious metals. However, the latter incurs a cost in terms of secure storage and insurance and jewellery typically has a high markup on the underlying value of the metal. Another option is futures contracts but, due to their volatility, these are suitable only for professional traders.

Investment trusts offer a practical solution by providing exposure to a diversified portfolio of commodities managed by experienced professionals. An active approach enables trusts to research the best opportunities in a broad and complex universe rather than investing indiscriminately across the sector.

Trusts will generally invest principally in the equities of mining and exploration companies rather than directly in the underlying commodities. While the share prices of mining companies are typically less volatile than the underlying commodities, returns from mining equities can diverge from commodity prices.

There are currently seven trusts specialising in the AIC Commodities and Natural Resources sector on the London Stock Exchange. The scope varies by trust, with some trusts investing in specific areas and others across commodities more broadly.
 

Investment trusts v open-ended funds

 

It’s fair to say that some of the benefits mentioned above, whether a diversified portfolio or manager expertise, also apply to open-ended funds but investment trusts have some unique attributes, which may help them deliver superior returns compared to their open-ended peers.

Firstly, open-ended funds are not publicly traded (unlike investment trusts), meaning that the size of the investable fund will rise and shrink with the purchase and sale of units in the fund. As a result, open-ended funds typically hold a significant proportion of cash in reserve to meet redemption requests, which can create a drag on returns.

As publicly traded companies, investment trusts do not have this problem, as the buying and selling of shares in the investment trust does not affect the size of the investable fund. Trusts are not required to retain cash for redemptions, which can boost returns for investors and allow longer-term investment in less liquid and private investments, including pre-IPO companies and private market royalty investments.

Trusts can also deploy gearing, which has the potential to enhance returns (although it can also augment losses on the downside), as well as using capital reserves to pay dividends.

 

 

^Disclaimer

^{Disclosure – Non-Independent Marketing Communication}

^{This is a non-independent marketing communication commissioned by BlackRock World Mining (BRWM). The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}