Benefits of Investing in Commodities

Diversification

Commodity returns have historically had low or negative correlations with the returns of other major asset classes, and may be used to diversify a portfolio. Other factors remaining same, diversified portfolios with low aggregate correlation tend to have lower volatility of returns. Therefore, diversification may improve risk-adjusted returns.

Commodities may react differently from stocks and bonds in various economic and geo-political situations, enhancing risk-adjusted returns and reducing the overall volatility of a portfolio.

Inflation protection

Changing macroeconomic factors (like inflation) tend to impact commodities differently from other financial products. Prices of goods and services rise in tandem with input prices, while prices of stocks and bonds tend to decline because of rising commodity input prices which put pressure on the economy and lower the value of future cash flows.

Hedge against event risk

Geo-political events like wars and supply disruptions due to natural disasters like hurricanes, droughts and floods may impact the supply of, and increase the demand for, certain commodities. Including commodities in a portfolio may act as a potential hedge against certain types of event risks. [Via]

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