Commodities protect against inflation, so buying before periods of high inflation is a good investment strategy; however, predicting when inflation will occur can be difficult. A commodity should be considered like any other investment, taking into account the investor's time horizon and risk profile. You can invest in commodities in more than one way and with more than one product. There are futures contracts, publicly traded products and mutual funds.
One of the attractions of commodities is the range of products available. For example, you can invest in agriculture, natural resources, precious metals, and livestock. You can also simply buy physical commodities, such as gold or silver. Commodities can be a good investment for many portfolios.
As mentioned earlier, commodities don't rely on the same market forces that affect other investments. In contrast, many commodities are governed by the principles of supply and demand. This eliminates some of the risk involved in investing in commodities. Global events, foreign government policies, international trade competition and economic conditions are all macroeconomic factors that affect commodities and could cause your investment to lose value.
Be sure to consult with your financial professional to determine when and how an investment in commodities may be right for your portfolio. Investing in certain funds involves special risks, such as those related to investments in small and medium-sized cap stocks, foreign securities, debt and high-yield securities, and funds that focus their investments on a particular sector. Most investors are aware of the Organization of Petroleum Exporting Countries (OPEC) and its impact on crude oil prices, but many other lesser-known cartels dominate the market for commodities such as potash and diamonds. Investors looking for ways to diversify their portfolio outside the more traditional asset classes associated with stocks and bonds sometimes turn to commodities.
Commodities are mainly traded using derivatives known as futures contracts, in which the seller undertakes to deliver a commodity to a buyer at a specified time and price in the future in exchange for a premium. For example, those interested in metallic commodities could buy shares in a mining company that focuses on gold.
