Benefits of Commodities

Abstract

Direct commodity investments have historically been a minor part of investors' asset allocation decision. In contrast, indirect investment (e.g., equity or debt ownership of firms specializing in direct commodity market production) was the principal means of obtaining claims on commodity investment. In recent years, however, investable commodity indices and commodity-linked assets have increased the number of available direct commodity-based investment products. In addition, there is increasing evidence that indirect commodity investment, through debt and equity instruments in commodity-linked firms, does not provide direct exposure to commodity price changes. However, there is little information on the expected as well as the actual risk and return performance of a wide variety of investable commodity indices or commodity linked product) that have been marketed. The purpose of this study is, first, to detail the various theoretical arguments for the risk and return advantages for real commodity investment and, second, to test if currently available investable commodity forms such as the Goldman Sachs Commodity Indices offer means to obtain the prescribed theoretical risk and return processes embedded in commodity investment.

The current paper is available for download: