April 17th, 2006 | 
Author: All of us are familiar with commodities like aluminum, gold, silver, steel, rice, wheat, oil, petrol, cotton, sugar, coffee, tea and cocoa. They are the raw material that manufacturers use to produce products, the fuel that powers our vehicles or the food that we eat. They are assets similar to stocks. However, very few of us know how to invest in commodities.
They are tangible as compared to bonds or stocks, which are pieces of paper and investors can use them as a means to diversify their portfolio or as a hedge against inflation. The prices of commodities rise with inflation and that’s why they are a useful investment in economies where inflation is running high. In comparison, stocks and bonds tend to give better returns when the economy is stable and the inflation is low.
Commodities can provide a hedge against other “event risks”, like the risk of war or a calamity. Such events can cause the prices of stocks and bonds to go down but they usually cause an increase in the prices of commodities. Commodities diversify the risk in a portfolio of stocks and bonds and improve the returns. Investors still prefer to stick to investing in stocks and bonds because it is easier to invest in them and because commodities are subject to more volatility. Now that there are products, which track a wide index of commodity futures, it is easier for people to invest in commodities.
There are now six major commodity indices that the consumers can use to invest. These are: Goldman Sachs Commodity Index, Dow Jones-AIG Commodity Index, Deutsche Bank Liquid Commodity Index, Rogers International Commodity Index, S&P Commodity Index and Reuters CRB Commodity Index. Over-the-counter instruments such as swaps and structured notes are the most common ways to invest in these indexes. Besides this, retail investors can also invest in funds like Pimco’s Commodity Real Return Strategy Fund, Oppenheimer’s Real Asset Fund, and the Rogers International Raw Materials Fund.
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