In a nutshell, commodities are the basic materials we use to create a functional world. The grains, pork, sugar and other foodstuffs we use food to sustain ourselves, as are the metals we use to construct our cities and vehicles and the energy we use to power and propel them.
These — foodstuffs, metals, and energy — are the three core classes of the commodities complex and they represent the fundamental building blocks of the global economy.
Within the context of investment, commodities must satisfy some basic criteria:
– Tradability: They must be tradable which means there must be a practical investment vehicle to help you buy and sell it. For instance, a commodity can be regarded as tradable if there is a futures contract allocated to it on a major exchange or if there is an ETF that tracks its price on the global market.
– Deliverability: A buyer must be able to take delivery of the commodity. Gold can be delivered by the ounce or the kilogram while wheat can be delivered by the bushel. For the purposes of investment, physical delivery can be impractical since most investors have neither the desire nor the facilities to store the commodities they buy.
– Liquidity: There should be a readily available market in which there are participants who can buy what an investor holds or sell an investor what he wants when the market is open for trade. This is called liquidity. Liquidity is essential because it enables the investor to get in and out of an investment without finding themselves in a situation where they have to look for someone to buy it.