|
Interestingly, few people really know how to invest and make money in commodity markets. It is a little ironic that these things we call "commodities" are all around us in everyday life.
Consider the leather chair in your office. It is made from the leather that comes from cattle. The price of cattle is tradable. Chances are there are also plastic parts in the chair. Some plastics come from Crude Oil. The price of Crude Oil is tradable. The chair would also have metal components. The prices of metals are tradable.
It is an interesting exercise to just take a look at the things around you and think about the influence the commodity markets have. Think of commodities as the physical ‘things’ that go into making almost everything around us: from hamburgers to cars; from jewellery to t-shirts. Price movement in these markets can offer significant profit opportunities for investors and traders.
Commodities as a New Asset Class
As the world’s markets continue their evolution toward one global marketplace, the advent of speculative commodity trading has contributed much to that unification.
The popularity of some modern investment products has removed some of the stigmas and fears that were associated with the perception of the rough and tumble world of commodities.
Previously, investors who sought the stability associated with a traditional diversified portfolio often considered commodity trading too risky. Recently, with money managers searching the globe for additional investment opportunities, commodities have moved into the spotlight.
The advantages of asset diversification have illuminated the value of commodity trading products (such as warrants) as tools for investors to mitigate their long-term exposure to the price swings inherent in today's markets.
By allocating some of their investment dollars to commodities, investors improve their ability to obtain desirable long-term results and, at the same time, lower the overall volatility of their portfolio.
Diversification into commodities can give a portfolio a more balanced inventory of assets. Whether or not high levels of inflation resurface, the allocation of a percentage of available funds into an asset that will successfully lower the overall volatility of a portfolio and improve the annual performance is generally an investor's goal.
The counter-cyclical nature of commodities to financial assets makes commodities an ideal asset class to incorporate into a portfolio and thereby achieve a more desirable return scenario.
Should inflation remain under control, the commodity portion of a properly allocated portfolio may lag other asset classes, but that lag normally indicates that the other non-commodity assets performed well. This is historically true because low to moderate inflationary periods allow for the stable environment in which traditional financial assets have performed well.
In such a case, the commodity allocation would have served its purpose as a counter-cyclical asset to the rest of the portfolio. Commodity trading products also provide a hedge against political instability and natural disasters that may adversely affect existing supply/demand alliances.
•Source: Australian Stock Exchange
|
