Why invest in Commodities?
Commodities that individual investors can invest in through ETF’s include Precious Metals (gold, silver, platinum and palladium), Base Metals (aluminum, nickel, copper, lead and tin), Energy (oil, gas and consumable fuels and energy equipment and services) and Agriculture(cotton, coffee, cattle, gain, orange juice etc.)
Commodities offer an alternative asset class to invest in that can help to diversify risk over the longer term and also act as a hedge against inflation.
Commodity ETF’s are constructed to establish an exposure in a single commodity or a diversified mix of commodities by either holding the physical commodity itself or trading in derivative contracts such as forwards, futures and swaps among others.
Relative to other asset classes, commodities can have volatile returns (high risk-reward) due to demand / supply shifts which directly impact prices.
Key factors to consider before investing
- Demand – driven by business cycle and seasonality
- Supply – Production/ manufacturing constraints
- Government Trade Policy changes
- Exchange rate against the USD
- Weather (esp. Energy and Agriculture)
- Investment funds activity
- Factors driving contango / backwardation ( ie forward premium/ discount)
- Among other factors
Commodities – Calendar Year returns by sub sector since 2009
Commodities – Quarterly returns by sub sector since 2009