The rationale behind investing in commodities
| Protection against inflation | Inflation rates and commodity prices are strongly connected and extremely correlated for the reason that commodities are crucial factors of any economy. As soon as the commodity prices rise, the inflation rates naturally rise as well. This means that the portfolio is protected against the negative effect of inflation and the loss of purchasing power. Only a few investments have this benefit (Asche and Oglend, 2016; Chinn, 2005; Frush, 2008; Huchet and Fam, 2016; Miffre, 2016; Papp et al., 2008) |
| Inelastic pricing | There are commodities in the marketplace that must be purchased irrespective of their price levels. These commodities are measured as inelastic commodities. For example, fuel for cars, natural gas for house heating and grains for the foodstuff we eat are reasonably inelastic. Which means that when the prices increase, we might be able to substitute some commodities with others such as corn as a substitute for wheat or cut back on how much we use by driving less or carpooling, but for the most part, we still have to purchase those commodities (Frush, 2008; Sasmal, 2015) |
| Greater diversification of portfolio and efficiency | Commodities give investors an opportunity to include assets that bring into line with their risk profile in their asset allocation. By including a commodities element to portfolio, it effectively forms an optimal and diversified portfolio (Chinn, 2005; Etienne et al., 2014; Frush, 2008; Hamilton and Wu, 2014; Huchet and Fam, 2016; Miffre, 2016; Papp et al., 2008; Taylor, 2016) |
| Reduced risk Volatility and bring smoother returns: | Nothing can crush a portfolio like market crashes and persistent market weakness. If you allocate to various asset classes, including commodities, which do not move in perfect lockstep with one another, your portfolio will be protected to the point from extreme portfolio instability. Holding a portfolio of only stocks and bonds generally has more portfolio risk than holding a balanced portfolio of stocks, bonds and commodities (Chinn, 2005; Frush, 2008; Hamilton and Wu, 2014; Natarajan et al., 2014; Huchet and Fam, 2016; Miffre, 2016; Taylor, 2016) |
| Potential for aggressive returns: | Investors considering to undertake higher risk in the hopes of getting higher returns, by investing in commodities can provide ways to achieve this goal. Even though the goal of investing in commodities is to build an ideal portfolio and also hedge against inflation, it also can be prepared with the hope of earning high returns. Owing to prices for various commodities are highly instable, there is a chance for investors to trade commodities and earn high returns (Frush, 2008; Huchet and Fam, 2016) |
| Better decision in making investment | Information on commodities is completely more objective and accurate than information on stocks. Various elements drive stock prices, but there is only one factor that drives commodities’ prices – supply and demand economics. Information on supply and demand is usually very objective and leaves little room for subjectivity (Frush, 2008; Taylor, 2016) |
| It consumes less time on research | Investing in commodities does not need much time on research, as it is usually done just to take advantage of the long-term price trends without the goal of zeroing in on specific individual investments. In contrast, when people invest in stocks and bonds, they often need to review various research reports and, for more involved investors, study financial statements and perhaps conduct proprietary research (Frush, 2008) |
| Greater price predictability | Commodity prices are, to some extent, more predictable over time than are the prices of traditional stocks and bonds. This is the straight effect of long-term supply and demand trends that various commodities experience over long periods (Asche and Oglend, 2016; Chinn, 2005; Frush, 2008) |
| Protection against inflation | Inflation rates and commodity prices are strongly connected and extremely correlated for the reason that commodities are crucial factors of any economy. As soon as the commodity prices rise, the inflation rates naturally rise as well. This means that the portfolio is protected against the negative effect of inflation and the loss of purchasing power. Only a few investments have this benefit ( |
| Inelastic pricing | There are commodities in the marketplace that must be purchased irrespective of their price levels. These commodities are measured as inelastic commodities. For example, fuel for cars, natural gas for house heating and grains for the foodstuff we eat are reasonably inelastic. Which means that when the prices increase, we might be able to substitute some commodities with others such as corn as a substitute for wheat or cut back on how much we use by driving less or carpooling, but for the most part, we still have to purchase those commodities ( |
| Greater diversification of portfolio and efficiency | Commodities give investors an opportunity to include assets that bring into line with their risk profile in their asset allocation. By including a commodities element to portfolio, it effectively forms an optimal and diversified portfolio ( |
| Reduced risk Volatility and bring smoother returns: | Nothing can crush a portfolio like market crashes and persistent market weakness. If you allocate to various asset classes, including commodities, which do not move in perfect lockstep with one another, your portfolio will be protected to the point from extreme portfolio instability. Holding a portfolio of only stocks and bonds generally has more portfolio risk than holding a balanced portfolio of stocks, bonds and commodities ( |
| Potential for aggressive returns: | Investors considering to undertake higher risk in the hopes of getting higher returns, by investing in commodities can provide ways to achieve this goal. Even though the goal of investing in commodities is to build an ideal portfolio and also hedge against inflation, it also can be prepared with the hope of earning high returns. Owing to prices for various commodities are highly instable, there is a chance for investors to trade commodities and earn high returns ( |
| Better decision in making investment | Information on commodities is completely more objective and accurate than information on stocks. Various elements drive stock prices, but there is only one factor that drives commodities’ prices – supply and demand economics. Information on supply and demand is usually very objective and leaves little room for subjectivity ( |
| It consumes less time on research | Investing in commodities does not need much time on research, as it is usually done just to take advantage of the long-term price trends without the goal of zeroing in on specific individual investments. In contrast, when people invest in stocks and bonds, they often need to review various research reports and, for more involved investors, study financial statements and perhaps conduct proprietary research ( |
| Greater price predictability | Commodity prices are, to some extent, more predictable over time than are the prices of traditional stocks and bonds. This is the straight effect of long-term supply and demand trends that various commodities experience over long periods ( |
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