Characteristics of commodities are:
1) Interest rates have minor impact on value of commodities.
2) They do not represent a claim on ongoing cash flow stream thus NPV valuation is not applicable.
3) Commodities trade in global markets, thus their value is depended on the dynamics of supply and demand of global markets.
If an investor wishes to invest/gain economic exposure to commodity assets, he/she may:
1) Buy underlying commodity.
2) Buy shares in a commodity-related company (“pure play investment”).
3) Commodity swaps and forward contracts.
4) Commodity futures.
5) Commodity linked notes.
6) ETFs.
Commodities have inverse relations to traditional financial assets like stocks and bonds. The former is affected by short-term expectations, i.e., they are at the highest when the economy is at its highest, as commodity prices are based on current supply and demand. Prices of financial assets however are affected by long-term expectations (anticipatory), thus they have inverse relation with the state of the economy. Only severe financial crises and liquidity shocks will render the movement in the same direction for commodity and financial asset prices. Case in point: during the global financial and credit crisis in 2008.
Studies have shown that positive correlation exists between commodity futures and emerging markets since emerging markets tend to be producers of commodities, as pointed out in the article below.
Key takeaways copied in verbatim below:
The rout that drove commodities to a nine-month low is proving irresistible to speculators anticipating that even slowing economic growth will cause shortages of raw materials.
While mounting concern about the economy wiped more than $8 trillion off the value of global equities in four weeks, Commodity Futures Trading Commission data show hedge funds and other speculators increased bullish commodity bets by 2.5 percent in the week ended Aug. 16, the most in a month.
The gains reflect global demand and the inability of oil and mining companies to keep pace rather than a rebound in growth in the U.S., which consumes twice as much crude as any other nation. The U.S. Energy Department expects a 490,000 barrel-a-day global shortfall of crude oil and liquid fuels this year and 420,000 in 2012, according to its latest monthly report.
Goldman’s commodity researchers reiterated recommendations on Brent crude, copper, zinc, U.K. natural gas, soybeans and gold on Aug. 8. Zinc advanced 6.6 percent in the past year, while the rest rose 22 percent or more. Bets on higher prices shrank for gasoline, heating oil, sugar and copper in the week through Aug. 16, the CFTC data showed.
Barclays also expects deficits in lead, nickel and tin for this year or next in part because of rising demand from China, whose gross domestic product grew 9.5 percent last quarter, outpacing every other major economy.
Commodities don’t always correlate with stock markets. The S&P GSCI Enhanced index rose 36 percent in 2002 as the MSCI All-Country World Index of equities slumped 21 percent, and advanced 45 percent in 2000 as stocks slid 15 percent. They dropped together by about the same amount in 2001 and 2008.
See, Hedge Funds Buying Corn to Silver to Soy After Commodities Futures Declinehttp://www.bloomberg.com/news/2011-08-22/hedge-funds-buying-corn-to-silver-to-soy-after-commodities-futures-decline.html.
1) Interest rates have minor impact on value of commodities.
2) They do not represent a claim on ongoing cash flow stream thus NPV valuation is not applicable.
3) Commodities trade in global markets, thus their value is depended on the dynamics of supply and demand of global markets.
If an investor wishes to invest/gain economic exposure to commodity assets, he/she may:
1) Buy underlying commodity.
2) Buy shares in a commodity-related company (“pure play investment”).
3) Commodity swaps and forward contracts.
4) Commodity futures.
5) Commodity linked notes.
6) ETFs.
Commodities have inverse relations to traditional financial assets like stocks and bonds. The former is affected by short-term expectations, i.e., they are at the highest when the economy is at its highest, as commodity prices are based on current supply and demand. Prices of financial assets however are affected by long-term expectations (anticipatory), thus they have inverse relation with the state of the economy. Only severe financial crises and liquidity shocks will render the movement in the same direction for commodity and financial asset prices. Case in point: during the global financial and credit crisis in 2008.
Studies have shown that positive correlation exists between commodity futures and emerging markets since emerging markets tend to be producers of commodities, as pointed out in the article below.
Key takeaways copied in verbatim below:
The rout that drove commodities to a nine-month low is proving irresistible to speculators anticipating that even slowing economic growth will cause shortages of raw materials.
While mounting concern about the economy wiped more than $8 trillion off the value of global equities in four weeks, Commodity Futures Trading Commission data show hedge funds and other speculators increased bullish commodity bets by 2.5 percent in the week ended Aug. 16, the most in a month.
The gains reflect global demand and the inability of oil and mining companies to keep pace rather than a rebound in growth in the U.S., which consumes twice as much crude as any other nation. The U.S. Energy Department expects a 490,000 barrel-a-day global shortfall of crude oil and liquid fuels this year and 420,000 in 2012, according to its latest monthly report.
Goldman’s commodity researchers reiterated recommendations on Brent crude, copper, zinc, U.K. natural gas, soybeans and gold on Aug. 8. Zinc advanced 6.6 percent in the past year, while the rest rose 22 percent or more. Bets on higher prices shrank for gasoline, heating oil, sugar and copper in the week through Aug. 16, the CFTC data showed.
Barclays also expects deficits in lead, nickel and tin for this year or next in part because of rising demand from China, whose gross domestic product grew 9.5 percent last quarter, outpacing every other major economy.
Commodities don’t always correlate with stock markets. The S&P GSCI Enhanced index rose 36 percent in 2002 as the MSCI All-Country World Index of equities slumped 21 percent, and advanced 45 percent in 2000 as stocks slid 15 percent. They dropped together by about the same amount in 2001 and 2008.
See, Hedge Funds Buying Corn to Silver to Soy After Commodities Futures Declinehttp://www.bloomberg.com/news/2011-08-22/hedge-funds-buying-corn-to-silver-to-soy-after-commodities-futures-decline.html.
