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What are the Benefits of Investing in Commodities?

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  • Written By: Dana DeCecco
  • Edited By: A. Joseph
  • Last Modified Date: 30 October 2016
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The main benefit of investing in commodities is to create a diversified portfolio. Anticipated growth in emerging markets could benefit the commodities investor because of increased demand. Commodity investments can be a hedge against inflation, because commodity prices tend to rise with inflation. Even though currency values might fall, commodity money tends to hold the value of the hard asset.

Asset allocation is an integral part of portfolio management. Different assets react in different ways to market forces. Correlated assets tend to react in the same way. Negatively correlated assets react in opposite ways. Investing in commodities incorporates a negatively correlated allocation method for the portfolio that is heavily weighted with stocks and bonds.

Historically, stocks and bonds are negatively correlated to commodities. A weighted portfolio including stocks, bonds and commodities might provide a risk-averse portfolio. This method complies with the first law of investing, which is to not lose money. Although investing in commodities is considered speculative and highly volatile, the proper proportion within a portfolio can reduce risk.

Commodity investments are available in many different forms. An alternative method to buying gold might be to invest in gold mining companies. Exchange traded funds (ETFs) are available that hold shares in a handful of gold mining companies. This form of commodity investing might be less volatile than trading hard assets. Many stocks are considered commodity stocks, such as oil companies and gold mining companies.

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An investment in natural resources might be wise for the long-term investor because commodities are not unlimited resources. Drilling deeper for oil and digging deeper for copper might imply that a limited quantity is available. Money invested in hard assets is called commodity money and might provide a hedge against a falling currency value. Many commodities are vital resources necessary for the survival of the human race. Populations of all countries are fed by the production of agricultural commodities.

Investing in commodities might take the form of futures trading. Options on futures are also available. Futures and options trading should be undertaken by a seasoned trader. These markets are extremely volatile and require technical knowledge and experience. Educational resources are available online.

Commodity funds provide an investor the opportunity to participate in the commodity market. Many funds have direct holdings in commodities such as gold. Other funds hold futures contracts on commodities such as hogs, corn and oil. The alternative means provided for investing in commodities will insure that nearly all investors have access to some type of commodity investment.

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candyquilt
Post 3

I'm sure that profits from commodity investment also depends on the investment commodity. Although commodities in general are basic raw goods that every country in the world needs, some are more limited than others. For example, petroleum is more valuable than corn. The best way to take advantage of commodity investment is actually to determine which goods are low in cost now but will become very costly in the future and invest in those goods.

SteamLouis
Post 2

@SarahGen-- There are always risks in investing. If you are searching for an investment opportunity not carrying any risk, you won't find it.

Having said that, there are ways to minimize the risk. One can do so by firstly studying the market closely and try to make accurate predictions about prices. After a while, one can successfully predict these shifts to a certain extent which will lead to wise buying and selling decisions. Secondly, an investor should never put all of his money on a single commodity. By investing in several different types of commodities, one can minimize losses if things do go unfavorable for one of the commodities.

An investor who follows these and makes smart decisions will profit greatly from commodity investment.

SarahGen
Post 1

The biggest benefit of investing in commodities is the profit. But it's also very risky because commodity prices fluctuate very rapidly. A lot of it depends on demand and supply. Sudden changes that affect production can suddenly increase or decrease the price. I think that as much as people profit from commodity investment, they also lose frequently. If we weigh the risks with the advantages, it might actually not be as advantageous as it seems.

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