Over the years, commodity futures have become an important part of every diversified and successful investment portfolio. This is probably because returns from most commodities over the last 50 years or so have been significantly higher than the average global inflation rate. It can, therefore, act as a hedge against inflation while providing a constant cash flow. There are many advantages of investing in commodities including the following.
1. Liquidity
Unlike real estate and some other investment vehicles, commodity futures often offer high liquidity. This simply means that it is easy to buy & sell futures, and you can also easily liquidate your position whenever required. Moreover, you have the ability to use the returns from a trade in other avenues without having to close your position.
2. Leverage
Since trading is done on margins, investors enjoy greater leverage. You will only need to deposit a portion of the value of the commodities contract with a broker to cover specified margin requirements for exchange. The greater leverage allows you the chance to generate even higher returns.
3. Diversification
Diversification is a proven way to keep your returns steady and minimize losses. Thankfully, commodity investments enable you to put your money in different avenues and steady your portfolio even when other investments are tanking. You can invest in precious metals like Gold, foodstuffs, energy and industrial metals.
4. Hedge against inflation
As the currency depreciates, stocks and bonds tend to earn less as well as fall in value. Most investors fear this kind of situation because it means a higher possibility of making huge losses. But commodity prices typically rise during periods of inflation, so anyone who has invested in the market can take advantage of the upswing. It acts as an inflation hedge.
5. Higher returns
Individual commodity prices may fluctuate due to a myriad of factors such as exchange rates, inflation, supply and demand, and the overall performance of the economy. Although this poses a risk of your investment losing value, there’s also a chance of raking in more returns. For instance, prices rise when the demand is high meaning that you can get higher profits during this period if you play your cards right.
6. Transparency
Another advantage of investing in commodities is that the trading is transparency and not vulnerable to manipulation. Prices are determined by a price discovery method without intervention by sellers or buyers. Moreover, all stakeholders/ investors are required to undergo strident security checks & due diligence to trade on the platform.