Commodity Asset class – Portfolio Enhancer & diversification
Commodity as the asset class
Rice in your table, Diesel in your car, coffee on your table, Sugar in your tea, Gold/ silver in your necklace, .. And so on … Commodities are everywhere. A commodity especially Gold is the oldest form of Investment. As Always global equity market volatility increase, there is a strong case for diversifying though commodity to reduce overall unsystematic portfolio risk.
Classification of Commodity
Generally there are four types of commodity
Bullion (Gold, Silver etc),
Agriculture (grains, pulses etc.),
Energy ( Crude, Natural Gas etc.)
Base metal (such as copper, zinc etc.) .
Uniqueness of Commodity as Asset class
Commodities as diversification .Generally, Equity & commodity price movement are inverse and complement each other.Still, the basic question remains why commodity diversification is required and why commodity is the unique asset class. We tried to put it in following matrix
|Seasonality||Commodities markets are seasonal & cyclical specially Agro commodity.|
|Correlation||Commodities are positive & negatively correlated within investment asset classes. For example, Gold, equity, crude and agro commodity are positively and negatively correlated with each other.|
|Weather||No other asset class is so much influenced by the weather pattern. (Specially agro commodity)|
|A Natural Hedge||Provide natural hedge against war, inflation, depression.|
Commodity diversification – The Portfolio Enhancer
Investor participation has also increased significantly in the last couple of years especially from emerging markets like China. Commodities as a separate asset class surely help the investor to hedge macroeconomic risk, decrease overall portfolio risk and to increase the overall risk adjusted portfolio returns. Few of the benefits are –
- Negatively correlated with Stocks and Bonds:
- Inflation Hedge.
- High Returns.
Who and how can you invest
With this, now lets look at how can you invest in commodity.
|Hedger||Risk Management||Consumer ( like food processing, Trader & producer|
|Trader (like exporters )|
|Producer (Integrated producer)|
|Speculator||Highly leveraged||Trader (HNI)|
|Arbitrager||Safe Return||Spot and futures arbitrage|
|Spread strategy across the market (like COMMEX & DGCX)|
|Investor||Portfolio Diversifier||Mutual Funds|
|Individual – Specially HNI|
Commodity always acts as diversify. It has a negative correlation with other asset classes. Diversification through commodity certainly benefits risk adjusted return But to the volatile nature of the commodity, the real challenge is to find out right commodity investment opportunity across the world.
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