Quick Answer
Commodities are tangible raw materials regulated by the CFTC, not the SEC. Precious metals produce no income and are taxed at a maximum 28% collectibles rate when held physically or through bullion-backed ETFs. Regulated futures get a 60/40 long-term/short-term blend regardless of holding period.
The exam tests four things here: how you can access these assets, what return characteristics they offer a portfolio, how each access method is taxed, and how futures pricing (contango and backwardation) behaves. Treat each access method separately, because the tax and regulatory answer changes with the vehicle, not just the underlying metal or commodity.
What Counts as a Commodity?
- Two broad categories:
- Hard commodities - natural resources that are mined or extracted (gold, silver, oil, natural gas)
- Soft commodities - agricultural products that are grown or raised (wheat, corn, coffee, cattle)
- Regulated by the Commodity Futures Trading Commission (CFTC), not the Securities and Exchange Commission (SEC)
- Traded on commodity exchanges (e.g., Chicago Mercantile Exchange (CME) Group, Commodity Exchange (COMEX), New York Mercantile Exchange (NYMEX))
Commodities are tangible, physical assets, distinct from financial assets like stocks and bonds.
Which Precious Metals Does the Exam Test?
The four primary precious metals for investment purposes:
| Metal | Ticker | Primary Use | Key Feature |
|---|---|---|---|
| Gold | Au | Store of value, jewelry, central bank reserves | Most widely held; benchmark precious metal |
| Silver | Ag | Industrial + investment | Higher volatility than gold; industrial demand component |
| Platinum | Pt | Industrial (catalytic converters), jewelry | Rarer than gold; heavily tied to auto industry |
| Palladium | Pd | Industrial (catalytic converters) | Most volatile; supply concentrated in Russia and South Africa |
How Can an Investor Get Exposure?
| Method | Description | Key Feature |
|---|---|---|
| Physical ownership | Direct purchase of coins, bars, bullion | Storage and insurance costs; no income; collectibles tax rate |
| Exchange-traded funds (ETFs) | Funds backed by physical metal held in trust (e.g., GLD for gold, SLV for silver) | Collectibles tax rate for bullion-backed ETFs |
| Futures contracts | Agreements to buy/sell at a specified price on a future date | Leverage, margin calls, 60/40 tax rule |
| Mining company stocks | Equity in companies that extract metals | Standard equity tax rates; potential dividends; indirect exposure |
| Mutual funds | Funds focused on precious metals or mining equities | Diversified exposure across multiple metals or miners |
Why Would a Client Hold Precious Metals?
Inflation hedge:
- Precious metals historically maintain purchasing power during periods of rising inflation
- Positive correlation with inflation - when inflation rises, precious metal prices tend to rise
- Gold is considered the classic inflation hedge and store of value
Market hedge / negative correlation:
- Precious metals tend to have a negative correlation with equities
- When stock markets decline, precious metal prices tend to rise (flight to safety)
- Provides portfolio diversification benefit by reducing overall portfolio volatility
No income generation:
- Physical precious metals and bullion-backed ETFs produce no dividends or interest
- Returns come solely from price appreciation (capital gains)
- Opportunity cost vs. income-producing assets (bonds, dividend stocks)
Carrying costs:
- Physical metals require storage (vault, safe deposit box, custodian)
- Insurance costs to protect against theft or loss
- ETFs charge expense ratios (management fees funded by selling small amounts of metal)
- Futures contracts involve margin requirements and potential rollover costs, explained below under market structure
Exam Tip: Gotchas
- Precious metals generate NO income (no dividends, no interest). The only return is capital appreciation. This makes them unsuitable as a sole investment for clients needing current income.
How Are These Access Methods Taxed?
| Access Method | Long-Term Rate | Key Rule |
|---|---|---|
| Physical gold/silver (and platinum/palladium) | Max 28% collectibles rate | The Internal Revenue Service (IRS) classifies physical precious metals as collectibles |
| Physically-backed precious metals ETFs (e.g., GLD) | Max 28% collectibles rate | Treated same as physical; NOT standard equity rates |
| Regulated futures contracts | 60% long-term / 40% short-term blended | 60/40 rule applies even to one-day trades |
| Commodity producer stocks and broad commodity ETFs that hold no physical metal | Standard long-term capital gains max 20% | Equities, not collectibles |
Exam Tip: Gotchas
- Physically-backed precious metals ETFs like GLD are taxed at the 28% collectibles rate, not the standard 20% long-term capital gains rate. The exam tests this distinction directly.
- Futures get the 60/40 blended rate regardless of holding period. Even a one-day trade gets 60% long-term treatment. The point tested is the 60/40 split itself, not any blended effective rate.
How Does Futures Market Structure Work?
- Spot price (cash price) - the current market price for immediate delivery
- Futures price - the agreed-upon price for delivery at a future date
- Contango - futures price is higher than the spot price (normal market condition; reflects storage/carrying costs)
- Backwardation - futures price is lower than the spot price (indicates supply shortage or strong near-term demand)
- Commodity prices are driven by supply and demand fundamentals, geopolitical events, and currency movements
- Dollar relationship: The U.S. dollar has an inverse relationship with commodity prices. When the dollar weakens, commodity prices tend to rise (and vice versa)
Why Does Rolling a Futures Contract Cost (or Earn) Money?
A futures-based commodity ETF has to close its expiring contract and open a position in a later-dated contract to stay invested. Whether that roll costs or earns money depends on the market structure:
- In contango, the fund sells the cheaper near-month contract and buys a pricier far-month contract, creating a rollover cost (negative roll yield)
- In backwardation, the roll works the other way, creating a rollover gain (positive roll yield)
60/40 Rule for Regulated Futures
- Regulated futures contracts receive special tax treatment: 60% long-term, 40% short-term, regardless of holding period
- Contracts are marked to market at year-end: unrealized gains/losses are recognized on December 31 even if the position is still open
What Risks Should a Client Weigh?
- Price volatility - commodity prices can swing sharply on supply disruptions, weather, geopolitical events
- No intrinsic cash flow - commodities do not generate earnings, dividends, or interest
- Storage and insurance costs - physical commodities have carrying costs that erode returns
- Currency risk - commodities are typically priced in U.S. dollars; exchange rate fluctuations affect international investors
- Political/geopolitical risk - supply of many commodities concentrated in politically unstable regions
- Regulatory risk - CFTC position limits and margin requirements can affect trading
- Liquidity risk - some commodity markets are thinly traded
What Should You Check on Exam Day?
- Commodities answer to the CFTC, not the SEC. Precious metals ETFs are still SEC-registered funds even though the underlying metal is a commodity.
- Physical metals and bullion-backed ETFs are taxed at the 28% collectibles rate, capped below the SEC-registered ETF's fund-share treatment you might expect.
- Regulated futures always split 60% long-term / 40% short-term, no matter how briefly you held the contract.
- Contango is futures-above-spot (normal); backwardation is futures-below-spot (shortage signal). A weaker dollar tends to lift commodity prices.