Commodities

Section: Commodities Estimated study time: 45 minutes Content: Commodities are physical goods — energy (crude oil, natural gas), metals (gold, silver, copper), and agriculture (wheat, corn, soybeans, coffee) — that are traded in spot and futures markets. Unlike financial assets, commodities have no intrinsic cash flows (no dividends or coupons) — their return comes from price appreciation plus, for futures investors, the roll yield and collateral yield. Commodity investments have historically provided inflation protection (commodity prices tend to rise with inflation, particularly as energy and food costs are direct components of price indices), portfolio diversification (historically low correlation with stocks and bonds), and access to global supply-demand dynamics. However, commodities also exhibit high volatility, no income, storage costs, and potential for extended bear markets driven by supply expansion. Investors access commodities primarily through: (1) commodity futures contracts, (2) physical ownership (primarily for precious metals via gold bullion or ETFs), (3) commodity-linked equities (energy producers, mining companies, agricultural firms), and (4) commodity index funds. Commodity futures are the most common institutional approach. The total return on a commodity futures investment has three components: (1) spot return (change in the spot price of the commodity), (2) roll yield (the return earned from rolling expiring futures contracts into new ones), and (3) collateral yield (the return on the Treasury bills or other instruments posted as margin). The roll yield can be positive or negative depending on the term structure of futures prices. The term structure of commodity futures determines the roll yield. When near-term futures prices are higher than far-term prices, the market is in backwardation — rolling futures forward generates positive roll yield (buying cheap far-term contracts and selling expensive near-term…