4: Investing in Commodities: Getting an Inflation Hedge

Commodities have a long and storied history. Early markets can be traced back around 6,000 years to Sumeria (livestock) and China (rice). Countless tales are available of kings, emperors, and pirates searching and hoarding gold and jewels to build their wealth. In particular, gold and other precious metals seem to capture our imagination as a way to measure wealth regardless of geographic boundaries or period. Generally, commodities are physical products or essential inputs to the products you consume and rely upon each day. These items include the grain in your bread and cereal, the crude oil in your gasoline, and the copper wiring in your house. Commodities are considered real assets, which are tangible assets with a physical substance and may be renewable (wheat and lumber) or non-­renewable (natural gas or gold). Because of their physical nature, commodities must be stored and transported to the end-user or intermediary. The commodity needs to be refined for commercial use (crude oil) or used as an input for other consumption purposes (soybeans). Although you may be aware of the wide range of commodities, you may be unfamiliar with the investment opportunities related to them. Rest assured, modern financial markets provide many pathways for you to participate in individual or pooled commodity investments.