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Commodities are known to outperform stocks at the end of an expansion cycle, and also in early recession. As per the Bloomberg CommodityIndex, the markets fell 54 percent from April 2011 to February 2016, mostly triggered by a contraction in industrial consumption in China.
Commodities are base-products that allow material things to be created where the category covers a broad range - from metals to oil, and these items are necessary because these are needed in most manufacturing projects, real estate constructions, electronics, and transportation.
Commodities like iron, steel, and copper have been rallying, since the start of the year, where the metal prices have increased in the range of 7 to 20 percent, and Brent Crude gained 26 percent.
Overall the growth of global economies is anticipated to remain flat but the resource commodities are growing, with the expectations of a rise in demand from China.
The market of China is one of the largest, which can consume global surplus commodity, which prevents oversupply. After the 2009 crisis, the commodity markets experienced one of the highest investments in mining, which was supported by Chinese demand but after 2012, the demand from China has been weakening over slower economic growth. The prices show a rise or fall in inflation, and are, consequently, affected by the changes in interest rates.
Agriculture-based commodities can be hit by climate change. Futures provide a hedging tool to investors. The global population is increasing and the demand for agricultural output continues to progress.
Climate change has been meddling harvests, and this can directly lead to an increase in the price of some of the crucial farm output. The prices have been rising and falling with higher volatility in the Chinese economy, however, the trade issues have transformed, where some countries link their trade to the matter of national security and have imposed restrictions.
To invest in this sector, one will have to get exposure to raw materials, metals, food, and minerals, which provides diversification. It has no direct correlation to the equity market. Certain individual commodity prices run in different cycles, debt markets and can provide a hedge against inflation.
To invest in such a sector, it is important to select the stocks, which can provide a fair amount of income through dividends and also remain steady during volatility.
Economic growth is mostly driven by industrial production and demand that increases the price of raw material, and inflation rises with interest rates, which depicts a direct relationship between commodities and the economy. In general, the class is supported by the current macroeconomic environment where it gains from inflation.
Buying a derivative provides a contract to purchase the commodity on a specific date and time, and this is safer than buying the physical commodity, as one may not have to store the asset and can convert the future into new contracts to avoid holding the physical asset.
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