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Commodities Investing

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INTRODUCTION

A commodity can be broadly defined as “a physical product, natural resource, or chemical that an individual can touch, taste, smell, mine, grow, consume, or deliver” (Lind Waldock, 2011). Commodities are fungible, meaning they are considered equivalent even though they may come from different producers. Because there is little product differentiation, commodity prices are fundamentally driven by global supply and demand (S&P, 2011).

A. MAJOR CATEGORIES OF COMMODITIES

Commodities are tangible physical products that can be broken into three major categories: industrial and precious metals, agricultural products, and energy.

Industrial and Precious Metals

Metals are classified as either industrial metals or precious metals. Industrial metals include base and ferrous metals such as aluminum, copper, nickel, zinc, iron, steel, lead, titanium, cobalt, tin, etc. These physical goods are generally used as production inputs. Precious metals are those that are rare and have high economic value. Precious metals include gold, silver, platinum, palladium, etc. While precious metals can also be used in an industrial capacity, they are generally considered to have intrinsic value. The higher value is driven by many factors including rarity, uses in industrial processes, and as an investment commodity. Investing in metals can be done either by buying the physical asset itself or through futures contracts. Another way to trade in metals is to invest in companies that explore or produce these metals, such as miners. As the economic environment continues to be uncertain, investors have tended place their funds in precious metals because they have an inverse relationship with currency strength and serve as a hedge against infla...

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