Who invest in Commodities and why?
There are two kinds of investors who invest in commodities. One who use it as a hedging tool to lock future prices and the second who use it to make profits by speculating on the future price movements. The first set of investors are usually investors who want to buy these commodities at a future price but are unsure of the future prices. e.g. Farmers would want to sell their grains at a particular future date. However, they are not sure what the future prices would be. Hence they would go Short in a particular futures contract in order to lock future prices. The same is applicable to any dealer who would be buying Gold on a future date and would want to lock the buying price today.The later set of investors trade on commodity futures and gain/lose depending on the future prices. They trade on these futures not with an intent of getting the actual commodity.
Why do Portfolio Managers like Commodities?
Commodity futures are the only investment tools providing a negative correlation to all other investment asset classes (stock, bonds, etc). This is because commodities tend to gain (during depressions) when all other asset classes loose value. Due to this -ve correlation commodities help reduce the overall risk of the portfolio hence making it much more attractive to investors.
When to invest in Commodities?
People usually tend to invest in commodities when there are economic downturns. In times of economic depressions, the stock market usually tends to go down. Due to the -ve correlation that commodities have with the stock markets people invest in commodities as a hedging tool.
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