Should you invest in Commodities?

Written by Vidya Kumar

October 28, 2012

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Getting Rich calls for cautious monetary planning, risk checking, investing and tracking the returns. The market has many intelligent instruments capable of turning you into gold digger but only when you are smart enough to use instruments wisely. One such financial instrument is commodities. Normally confusion persists about investing in commodities. Should you or should you not? Well, investment can bring huge returns if done carefully and under assistance of good quality brokerage houses or advisors having experience in Commodity Investing.

Commodity investing is fruitful, reason being that in the recent years commodity prices have outperformed prices of stocks and bonds. The demand for commodities specially from developing nations is increasing at a rapid pace. Big and promising development plans of nations like India and China to create infrastructure and build other manufacturing units skyrockets prices of hugely required commodities like steel, oil, cement etc. So now when you have increased demand coupled with decreased or limited supply, you face soaring prices of dear commodities. In long run, definitely you benefit by getting higher returns.

Another reason to cheer while investing is the certain behavior pattern that commodities show which actually helps in beating up inflation. They escalate when stocks go down. Unlike stocks and bonds, commodities are real financial assets and they react differently to dynamic market conditions. For instance take the scariest thing of market: inflation, it tends to soar prices of commodities. So when you have already invested in gold or silver, be sure to get well deserving higher returns in inflationary times thus beating inflation up. But on the other hand, stocks and bonds tend to perform better when the rate of inflation is stable or slow. Since year 1990, commodity prices have been negatively correlated with the S&P 500 index. Now this works as an advantage for investors. As commodities are negatively correlated with stocks and bonds, they play an important role by diversifying the portfolio thus helping in reducing risk and increasing returns over time.

Commodities not only reduce risk against inflation, but also hedge against unstable economic events or calamities. Stock prices low down but not commodities because during such emergencies, the prices of commodities go up due to their value and limited availability thus keeping them steady. Crashing stock prices bring mayhem on bourses during times of crisis such as wars and national emergencies but commodities actually save you. A good example worth mentioning would be the 1987 stock market crash where stock prices plummeted by almost 30% and still commodities were stable. Soon after when inflation fell, markets experienced and enjoyed bull ride.

So many benefits but remember commodities too are not free of volatility. They are equally or a little more volatile than the stocks and bonds, but they rarely go down at the same time as the stock market. At any time stocks might lose their shine thus proving to be worthless but commodities are always a huge hit and would continue to be so. 

Team Getting You Rich


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