Commodities Used as an Investment

The trend for commodities to be used as investment has evolved significantly in recent times with the automation in agriculture as well as the popularization of the internet. Basically, commodities are the raw materials used to produce the items which are consumed by the end users, for example crops, fuel or even gold. Hence, commodities include agricultural produce such as rice, wheat or poultry products, energy producing ones like gasoline and oil, or precious metals like silver, platinum and gold. Commodities also include quickly perishable products like coffee, cotton, sugar and cocoa.

Advent of commodity investment
Over the years, the demand for agricultural trading contracts to be standardized has given rise to the facet of commodities being used as investments. Such commodities contracts have initiated options and futures dealings in myriad soft commodities, metals, energy products and agricultural produce. Commodities are traded on stock exchanges around the world and the advent of globalization coupled with the popularity of the internet have enhanced the opportunities for commodities to be used as investments. The online trading facility has enabled the escalation in the growth of commodity trading and its evolvement into an exclusive class of investments.

Investments in preferred commodities
The performance of commodities as avenues of investments has oftentimes surpassed traditional investment vehicles like bonds and stocks. This high rate of performance is distinctly tracked by the Dow Jones AIG Commodity Index for fluctuations in the commodity trading. This index tracking has also awarded a distinction to trading in commodities, making it one of the preferential vehicles for investments since the high returns are easily visible and corroborated by the reputed and very reliable Dow Jones.

The demand for commodities is ever spiraling upwards due to increasing demand from developing and heavily populated countries like China, India and other nations that are in need for steel, oil and other commodities needed to develop their infrastructure and ever expanding industrial sectors. Due to the lack of adequate investments in the manufacture and production of commodities, supply cannot keep up with the increasing demand, leading to bottlenecks in the supply chain and increasing prices. The domino effect is on the gains in commodity trading escalating and the index showing a positive rise. This prospect of higher gains is the primary though not the only attraction for prospective investors to invest in commodities. Commodities as investment vehicles offer a buffer against inflation and also offer a positive avenue for diversification of your investment portfolio. This diversified portfolio allows you to spread your risks and cover losses, if any.

Hedging inflation with investments in commodities
The bonds, stocks and mutual funds are financial assets which are intangible while commodities are real assets. The changing economic environment fundamentally affects both these types of assets in varying manner and degree. While rising prices and swelling inflation may adversely affect the bonds and funds, the same results in a positive effect on the prices of the commodities. The inflation has a direct effect on the commodities resulting in an increase in their prices leading to higher gains on investments made in commodities trading. The anomaly is that since prices of commodities rise due to an accelerated inflation, investments in commodities shield your portfolio from the ill effects of the same inflation.

Inflation or to be more precise, the rise in inflation has an adverse effect on funds, stocks and bonds by lowering their values. Any future inflow of cash envisaged from investments in these funds and bonds will result in a lower purchasing power and hence in lesser goods being able to be bought. Rising inflation always results in a bearish market while when the inflation is stable or slowly reducing, the stock market is bullish. Hence, the results of diversified and a broad spectrum commodity index like the Dow Jones AIG Commodity Index is predominantly dedicated to commodities and their relation with inflation but strictly does not take into account the returns or behavior of the bonds and stocks.

Caveat emptor
To reap a full harvest of the benefits from investing in commodities is a complex challenge due to the impracticality of investing in the physical commodity, for example a bushel of paddy, or a barrel of crude or even a herd of buffaloes. Hence, investors have resorted to opportunities of investing in equities related commodities or their futures. The total availability or supply of a particular commodity may vary due to the occurrence of any natural calamity or man-made activity which will have a significant effect on the price as well as the gains to be enjoyed from investments in commodities. This includes the occurrence of floods, hurricanes, heavy off-seasonal rains, epidemics, political and international economic impediments, prohibitory measures as well market movements which may be or may not be manipulated by interested parties or speculators. It is very prudent to note that past performance of any commodities or commodity trading in general is no hard and fast indication of the trend which investments in commodities may follow.

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