A commodity market is a market that trades in primary rather than manufactured products. To understand the basics, commodities can mainly be bifurcated into metals like gold, silver, platinum, copper, energy like crude oil, heating oil, natural gas, gasoline and agricultural products like wheat, sugar, rice, cotton and cocoa beans.
The underlying purpose of adding commodities in a portfolio is to increase returns while lowering your risk. Over a period of time, commodities and commodities fund turn out to be an ineluctable investment alternative due to its following benefits:
Diversification: The returns of commodities market are free from direct influence of equity and debt market. In the long run, commodities tend to provide higher returns than many other asset class.
No chances of manipulation: Commodities markets are governed by international price movements. Thus, such movements are less prone to rigging or any sort of price manipulations by individuals.
Protection against inflation: There exists a positive correlation between commodity futures and inflation. Inflation causes an increase in the price of commodities such as coffee, corn and rice similarly value of commodity investment backing these goods also increase. So, in a nutshell, when inflation rises, the value of commodities also increases.
Liquidity: Unlike other investment vehicles, investment in commodity futures offers high liquidity. Here, an investor obtains the freedom to buy and sell futures for liquidating position whenever required.