Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 24

Commodity Funds

Public commodity funds evolved from the idea of mutual funds. That is to say, investors would entrust their capital to professional managers who, in return for a fee and a percentage of the profits, would make investments with the purpose of increasing the capital at their disposal. The more common form is organized as a limited partnership. The speculator invests around $5,000 in “units” of the partnership, which are redeemable at net asset value by the partnership. Unlike a position in futures contracts, the speculator can only lose his or her $5,000 investment.

There are some risk factors:

• Commodity futures trading is speculative. Commodity futures prices are highly volatile. Price movements of commodity futures contracts are influenced by changing supply-and-demand relationships; by weather; by government, agricultural, trade, fiscal, and monetary and exchange control programs and policies; by national and international political and economic events; and by changes in interest rates. In addition, governments from time to time do intervene, directly and by regulation, in certain markets, particularly in currencies and gold. Such intervention is often intended to directly influence prices.
• Commodity futures trading may be illiquid. Most United States com-modity exchanges limit the fluctuations in commodity futures contract prices during a single day by regulations referred to as the “daily price fluctuation limit” or “daily limit.” During a single ...