If you were to sit down with almost any professional investor, they would all agree that when it comes to trying to make money off savings, commodities is without doubt the riskiest. As you look at the commodities market, you would see that they are really just busy gambling parlors comprised of a number of hyperactive markets whereby you would bet on price movements associated with a number of different products such as grains, materials, metals, gas, oil, etc.
Keep in mind that commodity trading was initially designed to spread risk of price changes between large groups of players. While risks exist for pools of professional investors, because of the way in which this type of investing was designed, individuals are the ones that have the greatest risks. As an example, farmers often sell crops prior to being planted with no clue if the crops will do well or fail. If the crop were destroyed for some reason causing market prices to spiral down, a group of investors would lose less money than one person would.
As you can see, when investing in commodities as an individual any risk would be yours alone. In fact, when individuals decide to invest or trade commodities, before a broker would allow an account to be opened so trading could start, the person would be required to show proof of having financial means to lose money in risky situations. Now, along with knowing the risks that go along with commodities, it is just as important to understand that investing in commodities can also be a good idea.
For starters, inflation can be a positive thing, even if the portfolio were modest. In the past several months, we have seen a trend in the global economy becoming stronger. Because of this, the demand for various raw materials has increased. With the increased demand, price of commodities experiences pressure. Now, inflation affects only stocks and bonds so using a small portion of investment money to purchase commodities could prove beneficial.
Along with commodities being a hedge against inflation, they can also serve as a hedge against unstable events or even catastrophes. Remember, it is natural for commodity prices to increase whenever there are times of crisis, not only during crashes during the stock market but also times of war. A perfect example was once Kuwait was invaded by the Iraqis, prices in commodities did quite well although stocks did not. Because we are still officially at war, it would be a good time to consider prices of commodities for investing.
Another reason that commodities make sense is that prices go up whenever stocks go down. Since commodities are real assets, unlike stocks and bonds, they have a different reaction whenever economic conditions change. Now, since the early 1990s, commodity prices have had a negative correlation with the S&P 500 but because commodities are not correlated to stocks and bonds in a positive manner, they actually help diversify a portfolio. In fact, commodities help lower risk and improve potential for returns over the long haul.