Commodities can diversify a portfolio. Commodity returns usually have low or negative correlations with the returns of other major asset classes.
Many investors think the commodity market is difficult to understand. All commodities are globally traded and the global demand-supply situation is widely known and available to anyone who reaches out for it. So, understanding commodities is not complex as it is basic economic factors and seasonal cycles that affect prices.
The fact is that prices of derivatives are directly linked to prices in spot markets. Apart from this, unlike stocks, which can move by even 20 per cent in a single session, metal and energy contracts can rise or fall up to 6 per cent in a day.
Most commodities that are traded are produced and consumed across the globe. One cannot change a commodity’s fundamentals. Commodity prices reflect demand-supply dynamics and thus operators cannot manipulate prices. Besides, commodities are traded worldwide and hence there is a minimal chance of manipulation by a handful of participants.
INFLATION PROTECTION- Commodities, however, maintain their value and price even during high inflation.
Commodities may act as a potential hedge against some event risks—a buffer against losses.
Unlike investment in assets like real estate, investment in commodity futures offers high liquidity. In general, well-planned commodity investments can provide higher returns than investments in other assets.