Understanding Commodities as an asset class

 

A commodity refers to a standardized resource which is used in the economy. Examples of common commodities include gas, oil, timber, gold among others. Commodities are generally sought after by manufacturers who use them as raw materials in their production process.

Just like any goods, the price of commodities is set by market based on supply and demand. Prices of commodities will always change due to industrial demands, demographics, seasonality and supply constraints.

An investor will take a long position on a commodity if they think the price will rise. It is also possible to take short positions through derivative contracts and get profits if price falls.

It has to be noted that commodities have uncertain expected returns. Unlike equities and bonds which are financially engineered to provide a reasonable return, commodities are nothing more than inanimate objects

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