Commodities

Commodities can be subdivided into:

  • Energy: oil, natural gas. Renewable electricity like solar and wind is harder to trade currently.
  • Precious metals: gold, silver, …
  • Industrial metals: copper, zinc, aluminium, nickel…
  • Agricultural:
    • Flora: wheat, soy, corn, coffee, cocao…
    • Fauna: Lean hogs, live cattle, feeder cattle

While commodities are quite varied, the main thing that unites them is that they have some real world use other than investment and speculation. However, over the years the amount of investment and speculation has increased, so called “financialization”. Still, they are still quite different from other financial instruments, and somewhat diversifying and inflation-hedging.

S&P GSCI (Goldman Sachs Commodity Index)
Real return0% +- 5%
Volatility20%
CorrelationNormally low, but high in equity downturns
TestfolioGSGSIM
InflationReal

This index is weighted by production, approximately:

  • Energy: 60%
  • Precious metals: 5%
  • Inductrial metals: 10%
  • Agricultural flora: 15%
  • Agrictultural fauna: 10%

BCOM (Bloomberg Commodity Index)
Real return0% +- 5%
Volatility20%
CorrelationNormally low, but high in equity downturns
TestfolioDCMSX
InflationReal

This index has caps on the weights, and is now approximately:

  • Energy: 30%
  • Precious metals: 20%
  • Inductrial metals: 15%
  • Agricultural flora: 30%
  • Agrictultural fauna: 5%

Despite its different composition, it tracks the GSCI quite closely in direction.