The Handbook of Commodity Investing

CHAPTER 1

A Primer on Commodity Investing

Frank J. Fabozzi, Ph.D., CFA

Professor in the Practice of Finance

School of Management

Yale University

Roland Füss, Ph.D.

Professor of Finance

Endowed Chair of Asset Management

European Business School (EBS)

International University Schloss Reichartshausen

Dieter G. Kaiser, Ph.D.

Director Alternative Investments

Feri Institutional Advisors GmbH

Research Fellow

Centre for Practical Quantitative Finance

Frankfurt School of Finance and Management

Commodities are currently enjoying a renaissance due to institutional investors such as pension funds and traditional portfolio managers. Many market participants attribute the recent dramatic price increases in commodities to increased demand for consumer goods, particularly from the populous countries of India and China. Demand from Brazil and Russia, two of the fastest-growing economies currently, has undoubtedly also played a part. (Collectively, these four countries are referred to as the BRIC countries.)

Globalization and economic and political convergence have been behind the stimulated growth in these economies to a large extent. Besides increased investment on an enterprise level, increasing state investment in infrastructure in China has also led to enormous demand for commodities. This has caused a shock to the worldwide supply and demand dynamics, leading to at least short-term price increases.

Such dramatic increases in commodity prices are often explained by the commodity super cycle ...