In recent
years we have seen the commodities market enjoy an impressive bull run. With a
few exceptions, the prices of commodities have experienced major increases and
generally outperformed other investment class. This trend has brought
commodities under the focus of investors.
What are Commodities
Commodities
are a broad category of raw materials used by industries and traded on specialist commodities markets that
include
·
Energy – Includes natural
gas and oil-related commodities
·
Industrial metals –
Includes Copper, Zinc, Aluminum, lead, and Nickel
·
Precious metals – Gold
and Silver
·
Agriculture – Includes
cotton, wheat, soybeans, coffee, and sugar
·
Livestock – Includes cattle
and hogs
Why should you invest in Commodities
Commodities
are a source of inflation and hence they provide a strong hedge against it. Commodities
provide benefits of risk diversification by adding them to a portfolio. Based
on historical results, adding commodities to your portfolio will increase
portfolio returns while lowering your risk. By adding a small percentage of
commodities, say 6% can improve your overall portfolio performance and returns.
Hence Commodities asset class has become an effective way of diversifying your
portfolio. Investing directly in commodity producing assets gives linked
returns with lower volatility and cash flow.
How to Invest in Commodities
Investors
have a number of options available with them to investing money in some of the
products they use daily such as food, oil and metals. There are number of ways
available to invest in commodities: future market, which is used by speculators
looking to make money on whether the price of a commodity will increase or
decrease in the future. There are a small number of mutual funds and Exchange
Traded Funds available for individual investors and for small institutions.
Risks in Commodities
Obviously,
investing in Commodities is not without risks and it is not a typical for this
asset class to under perform for an extended period. Commodity prices are very
volatile and are affected by geopolitical risk, speculative risk and the risk
of fraud in trading commodities
Conclusion
There are
many reasons for you to invest in commodities. Judging by historical data and
results, this asset class can provide attractive absolute and relative returns during
appropriate economic environment. They have historically been positively
correlated with inflation, while other asset class has been less or negatively
correlated with inflation. If anyone invests in this asset class during
unfavorable economic conditions, they must be prepared for the possibility of unpleasant
results.
