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Pros and cons of Commodity investing

This article is part of
Guide to Commodity Investing

Investing in commodities can benefit a client’s portfolio as it provides:

1) Diversification benefits: academic research has shown that commodities have historically displayed a low correlation with equities and bonds

2) Protection against inflationary pressures: analysis has shown that commodities have a positive correlation with inflation, unexpected inflation and changes in inflation

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3) A store of value: As real assets that are priced in US dollars commodities have typically held their value during periods of high or rising inflation and US dollar weakness

4) Exposure to a growth in demand for commodities, driven by global economic growth

Investors should be aware that there are also cons to commodities investing such as:

1) Commodities can display relatively high levels of volatility.

2) There tends to be a high degree of cyclicality to energy and metals and mined commodities.

Nicole Vettise, client portfolio manager of JPM Natural Resources fund, said investors should always remember that they can experience significant losses due to the volatility of the sector.

But she said the trade off for this is investors are able to tap in the long term structural story for commodities.

Ms Vettise said: “In the past this sector has offered investors significant returns and we believe that it will return to favour and do so again over the longer term.”