Why Invest in Commodity Market?
1. Helps to beat inflation:
Inflation means things getting expensive.
The primary concern during investing is beating inflation.
Products like pulses, oil, gold, silver, spices, and cotton get expensive. Investing in commodities through future trading helps in beating inflation.
2. Diversification of Portfolio:
All financial planners suggest us to diversify our portfolio and commodities.
They have a high return capacity just like equities and we have an option other than equity that can help us earn big returns.
To diversify our investment portfolio, we may invest in E-Gold. i.e.Spot
Market (NSEL) or in Futures Market.
In order to make the best of price discrepancy, we can look into purchase
and sale of similar commodities in different markets. (arbitrage)
3. Hedging of Risks:
The commodities behave differently in times of a disaster like war, drought,
flood, political uncertainty etc.
Shortage in products may arise and demand might increase. This pushes the
price up giving an option to hedge risk.
4. Surplus fund:
Commodities is one of the best option available to keep the surplus amount of fund which one wants to invest.
High financial leverage is a great advantage of trading in commodities.
Margin required for trading in commodities is less. Except in spot trading where complete cash is required.
It ranges between 5-15% whereas for equity trading it is between 10-25%.
Global Institutional investor interest in commodity trading has increased rapidly in the recent years.
This reflects strong recurrent and structural forces working in favor of commodity markets and the need to diversify personal investments into appropriate financial products.
But what are these commodities?
The inputs used in the production of other goods and services is known as commodities.
The supply and demand in the global market determines the price of the commodity.
The aspects such as weather, geo-political events, and supply-side shocks (e.g., wars, hurricanes) influences the supply and demand conditions.
Energy products like oil and natural gas, metals like gold, copper and nickel, and agricultural products like sugar, coffee, and soybean are frequently traded commodities.
Commodities offer a better way to diversify a portfolio of stocks and bonds. They offer better returns as well.
Yale Study reveals the following information:
Commodities futures have produced better annual returns than stocks return and exceeded bond returns futher since 1959.
Commodities futures outperformed stocks during 1970s.
During the 1980s the exact opposite was true - evidence of the “negative correlation" between stocks and commodities.
The returns on commodities futures "positively correlate" with inflation.