Commodities as an Asset Class

Investors have been pouring into commodities for three basic reasons, as discussed in Chapter 1. One is that returns on other investments have not been particularly attractive, and investors are searching the world over for better returns. The second is that the prices of some commodities have been rising, and investors follow rising markets. The third, which is the subject of this chapter, is that commodities have newfound respectability among investors. Commodities have become an asset class, in the words of the marketing departments on Wall Street.

In fact, of course, commodities have been a legitimate and valuable investment sector forever. It is just that some, perhaps most, investors have traditionally avoided them. One thing that has recently changed is that many institutional fund managers have moved into commodities, in many cases for the first time ever. Another new development has been the release of some academic and market research quantitatively discussing the validity and usefulness of commodities as investment vehicles.

Commodities traditionally have been seen as something less than full-fledged investment-grade assets by many mainstream financial market types. That is one reason why larger investment banks, brokerage houses, and others call them, even today, alternative assets. There are many reasons that commodities have been segregated from traditional investments, relegated to second-class status. Most of them have valid bases, ...

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