Understanding Commodities

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Investing in Raw Materials

[By Staff Writers]

According to Jeff Coons, PhD, CFP™, a commodity is a standardized asset that is typically used as an input for production of one or more products.  Almost any raw material or product that has very consistent characteristics irrespective of the producer (i.e., little to no differentiation between producers) may be considered a commodity.

Commodity Examples:

Examples of commodities that are traded broadly in the financial markets include food products, such as wheat and pork bellies, and metals, such as gold and aluminum.  In most cases, the trading of commodities is done through futures.

A Supply / Demand Hedge

Commodities do not have ongoing cash payments associated with them. Instead, a commodity’s value is a result of supply and demand for the asset as a consumable or as an input for other goods. 

Thus, while some physician-investors use commodity futures as a hedge to offset changes in the value of the commodity between now and the date the commodity is needed by the investor, others will make commodity investments based upon a belief that the supply/demand relationship will change in their favor. 


In the latter case, commodities represent a knowledge-based market in which an investor must believe that he/she has a better perspective on the future price of the commodity than other speculators. Consequently, if a physician-investor does not have superior information regarding the future supply and demand for the commodity, then commodity investments become generally less attractive as compared to investments providing ongoing cash payments.


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