Why Commodities

Global Institutional investor interest in commodity trading has increased significantly over the past few years. This, in part, reflects powerful cyclical and structural forces working in favour of commodity markets, while, also the realisation of the need to diversify personal investments into upcoming and popular financial products.

But what are these commodities?

Commodities are goods that are typically used as inputs in the production of other goods and services. Commodity prices are determined largely by supply and demand interactions in the global marketplace. Supply and demand conditions may be influenced by factors like the weather, geo-political events, and supply-side shocks (e.g., wars, hurricanes).

Some examples of commonly traded commodities are energy products like oil and natural gas, metals like gold, copper and nickel, and agricultural products like sugar, coffee, and soybean.

Why Commodities

Commodities exhibit interesting risk-return profile. Commodities not only offer a good way to diversify a portfolio of stocks and bonds, they often offer better returns. According to a Yale Study,

Since 1959, commodities futures have produced better annual returns than stocks returns and outperformed bond returns
even more.

During the 1970s, commodities futures outperformed stocks; during the 1980s the exact opposite was true - evidence of the
"negative correlation" between stocks and commodities that many of us have noticed.

The returns on commodities futures "positively correlate" with inflation. Higher commodity prices were leading a wave of high
prices in general (i.e., inflation), and that's why commodity returns do better in inflationary times, while stocks and bonds perform
poorly.

The returns on commodities futures were "triple" the returns on stocks in companies that produced the same commodities.

Benefit of Investing in Commodities

Diversification

Commodity returns have historically had low or negative correlations with the returns of other major asset classes, and may be used to diversify a portfolio. Other factors remaining same, diversified portfolios with low aggregate correlation tend to have lower volatility of returns. Therefore, diversification may improve risk-adjusted returns.

Commodities may react differently from stocks and bonds in various economic and geo-political situations, enhancing risk-adjusted returns and reducing the overall volatility of a portfolio.

Inflation protection

Changing macroeconomic factors (like inflation) tend to impact commodities differently from other financial products. Prices of goods and services rise in tandem with input prices, while prices of stocks and bonds tend to decline because of rising commodity input prices which put pressure on the economy and lower the value of future cash flows.

Hedge against event risk

Geo-political events like wars and supply disruptions due to natural disasters like hurricanes, droughts and floods may impact the supply of, and increase the demand for, certain commodities. Including commodities in a portfolio may act as a potential hedge against certain types of event risks.

Open An Account

News round the Corner

Download Forms

Customer Care

1800 102 6776