What Are Commodities and Their Investment Characteristics?
Just what, exactly, are commodities? Put simply, commodities are the raw materials humans use to create a livable world. Humans have been exploiting earth’s natural resources since the beginning of time. They use agricultural products to feed themselves, metals to build weapons and tools, and energy to sustain themselves. Energy, metals, and agricultural products are the three classes of commodities, and they are the essential building blocks of the global economy.
Commodities have to meet the following criteria:
Tradability: The commodity has to be tradable, meaning that there needs to be a viable investment vehicle to help you trade it. For example, if a commodity has a futures contract assigned to it on one of the major exchanges, if a company processes it, or if an ETF tracks it.
Uranium, which is an important energy commodity, isn’t tracked by a futures contract, but several companies specialize in mining and processing this mineral. By investing in these companies, you get exposure to uranium.
Deliverability: All the commodities have to be physically deliverable. Crude oil can be delivered in barrels, and wheat can be delivered by the bushel. However, currencies, interest rates, and other financial futures contracts are not physical commodities.
Liquidity: Every commodity has an active market, with buyers and sellers constantly transacting with each other. Liquidity is critical because it gives you the option of getting in and out of an investment without having to face the difficulty of trying to find a buyer or seller for your securities.