Investing in Commodities
Commodities rise and fall in response to economic activity and industrial demand - along of course with supply dynamics.
Investing in commodities can add diversification in the portfolio whilst at the same time providing exposure to growth in the economy.
Commodities have long been considered a hedge against inflation. Evidence is mixed on this account, but the addition of some base materials can ensure investors against energy crises or other supply chain issues.
Generally speaking, commodities can be quite volatile (hence more risky) than equity investments. By adding commodities to a portfolio of less volatile assets, their negative correlation to other assets brings down the overall volatility of the portfolio, especially in times of rising prices. Methods of Investment
Investing in commodities directly requires physically acquiring and storing the asset. Selling a commodity means finding a buy and handling delivery. This might be easier to do with metal commodities but directly trading barrels of crude oil might be more complicated.
Another way to directly expose yourself to commodity prices is futures contracts. This requires investors to buy or sell a given commodity at a specific price and time in the future. To trade futures contracts, investors require an appropriate brokerage or broker. These types of contracts are usually traded by institutional or advanced investors because of the large capital backing required. For example, trading 1 gold contract is equal to 100 troy ounces of gold, which equals ~150,000 USD commitment. Your average retail investor may not have 150 grand to blow on 1 contract…