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Why are commodities a good way of reducing risk?

Spreading your risk

As a way of reducing risk, investors tend to diversify their portfolio of financial instruments among different asset classes, and commodities are an excellent choice.

In this way, the poor performance of one security will, ideally, be counteracted by the strong performance of another. It is not uncommon to see that when the stock markets are declining, commodities markets see the opposite effect.

Oil is the most important commodity in the US economy. When the price of oil rises, it tends to affect gas and food prices as well.

Another important commodity is gold which is often bought as a hedge against inflation. The price of gold also go up when there is a lot of economic uncertainty as it is seen as safer alternative to currency.

 

 
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