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Investment - Commodities
Commodities, such as precious and base metals, energy items, and agricultural products, tend to grow in price with inflation. So, they can give inflation protection in a portfolio.
There are various ways for investors to obtain exposure to commodities:
Buy the physical commodity
Buy shares of natural resources or commodity-related corporations
Buy commodity derivatives
Purchase the Physical Commodity
Theoretically, an investor may buy a barrel of oil, a herd of cattle, or a bushel of wheat. But the transportation and storage problems connected with purchasing a physical commodity mean that it is not customary for investors to obtain access to commodities this way.
Purchase Shares of Natural Resources or Commodity Related Companies
Investors can buy shares of companies that have a large percentage of their operations in the exploration, recovery, production, and processing of commodities. For example, an investor who seeks exposure to gold may buy shares in gold producers, such as Newmont Goldcorp (NEM: NYSE), Barrick Gold Corporation (GOLD: NYSE), Franco-Nevada Corporation (FNV: NYSE), or Newcrest Mining (NCMGY: OTCMKTS). Growing concern for the environment, along with increased inflation risk, has resulted in continuous interest in linking commodities financing with sustainability.
Purchase Commodity Derivatives
Investors can buy derivatives in which the underlying asset is a commodity or a commodities index. Typical commodities derivatives are forwards, futures, options, and swaps. Recall that futures and other types of options are traded on exchanges, whereas forwards, swaps, and other types of options are privately negotiated agreements.
Commodities, such as precious and base metals, energy items, and agricultural products, tend to grow in price with inflation. So, they can give inflation protection in a portfolio.
There are various ways for investors to obtain exposure to commodities:
Buy the physical commodity
Buy shares of natural resources or commodity-related corporations
Buy commodity derivatives
Purchase the Physical Commodity
Theoretically, an investor may buy a barrel of oil, a herd of cattle, or a bushel of wheat. But the transportation and storage problems connected with purchasing a physical commodity mean that it is not customary for investors to obtain access to commodities this way.
Purchase Shares of Natural Resources or Commodity Related Companies
Investors can buy shares of companies that have a large percentage of their operations in the exploration, recovery, production, and processing of commodities. For example, an investor who seeks exposure to gold may buy shares in gold producers, such as Newmont Goldcorp (NEM: NYSE), Barrick Gold Corporation (GOLD: NYSE), Franco-Nevada Corporation (FNV: NYSE), or Newcrest Mining (NCMGY: OTCMKTS). Growing concern for the environment, along with increased inflation risk, has resulted in continuous interest in linking commodities financing with sustainability.
Purchase Commodity Derivatives
Investors can buy derivatives in which the underlying asset is a commodity or a commodities index. Typical commodities derivatives are forwards, futures, options, and swaps. Recall that futures and other types of options are traded on exchanges, whereas forwards, swaps, and other types of options are privately negotiated agreements.
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