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.
  • Diversification.
  • High Returns.

 

Who and how can you invest

 

With this, now lets look at how can you invest in commodity.

 

Players Objective Who
Hedger Risk Management Consumer ( like food processing, Trader & producer
Trader (like exporters )
Producer (Integrated producer)
Speculator Highly leveraged Trader (HNI)
Institution
Arbitrager Safe Return Spot and futures arbitrage
Spread strategy across the market (like COMMEX & DGCX)
Investor Portfolio Diversifier Mutual Funds
Corporate
Individual – Specially HNI

 

 Conclusion

 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.

cryptocoinage

RT @jonmatonis: “If it [#bitcoin] evolves into money, it would be a commodity money.” –@PeterSurda http://t.co/IAe0FpyIoj #economics
cryptocoinage

RT @jonmatonis: “If it [#bitcoin] evolves into money, it would be a commodity money.” –@PeterSurda http://t.co/IAe0FpyIoj #economics
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2 Comments to Commodity Asset class – Portfolio Enhancer & diversification

  1. Commodity trading is very risky. I came out of it.

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