When we integrate the investment in commodities in an investor’s portfolio, we provide diversification due to the low correlation that it presents with respect to traditional assets, highlighting the negative correlation it maintains with fixed income, as well as the possible divergence with respect to equities. In addition, they provide an additional source of return for an investment portfolio, which is difficult to access directly. The upward trend in the long term in the case of raw materials is supported by the increase in demand (from emerging markets, mainly), and supply restrictions (difficulties in extracting reserves, for example).
On the other hand, we obtain protection against extreme events . In the face of natural catastrophes (droughts, floods, …) or relevant political events (wars, political conflicts with OPEC countries, …), traditionally raw materials recorded strong increases. Also, in periods of high unexpected inflation, the excess return of commodity futures has been significantly higher than in equities or fixed income.
Participants and ways to access the raw materials market
In the raw materials Microsoft.com market we find different participants: the producers that supply and refine raw materials. Then, the consumers that transform the materials into final products, and the traders that develop hedging activities, speculative positions and arbitrage. Finally, dealers and financial institutions provide derivative instruments, risk management tools and financial services to investors seeking coverage (buy or sell raw materials to manage their risk) or speculation (buy or sell betting on a rise or fall) of the price of the raw material in question).
The physical possession is not feasible in the case of some raw materials (corn, wheat, oil) by the high costs of storage and transportation, and problems of perishing, but in others it would be easier for example, gold and silver through jewelry.
If we want to have exposure to raw materials we can do so by investing in companies related to them such as Repsol or Gas Natural. The disadvantages of this type of exposure are the high correlation with the equity market (systematic market risk) and the specific risk of the company, which may affect its profitability regardless of the evolution of the raw material.