COMMODITY PRICES AND THEIR EFFECT ON FINANCIAL MARKETS
As a discrete asset class, commodities are vital to any diversified portfolio due to their unique characteristics:
- When equity markets fall, commodity markets tend to rise, and vice versa.
- The price of equities can go to zero – not true of commodities.
- There is no credit risk on a commodity.
- Commodity returns are higher than inflation.
- Bonds and equities are negatively correlated to inflation (this increases with the holding period), whilst the opposite is true of commodities – thus commodities provide an inflation hedge.
- Commodities are correlated with inflation, unexpected inflation and changes in expected inflation.
- Commodity prices can rise even if the economy is going nowhere.
- War and ...