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In my investment portfolio for my clients, I'd allocated around 10%-20% towards commodities funds. In theory, Commodities are supposed to be able to hedge against inflation and provide some sort of diversification from Equities and Bonds. Some commodities funds gain direct exposure by investing into commodity futures and some invested into shares of commodities related companies.
There are 2 main types of commodities which we termed as hard and soft. For simplicity, we consider commodity that can be grown or raised as soft commodity, and commodity that you have to mine or drill as a hard commodity.
Hard Commodities
* A hard commodity are commodities such as metals, crude oil, or coal. This term generally refers to commodities that are mined, rather than grown.
* They require extensive capital expenditures in order to be retrieved from the earth. These commodities are finite in nature and have limited resources.
* Demand for these resources has rose significantly over the years to service the fast growing global economy, especially in the emerging markets of China and India.
* The demand for hard commodities normally follows economic growth cycles and that prices of oil and industrial metals will pick up fast when the economy booms.
* From the supply side, the hard commodities that are mined and drilled may not fast enough to meet this rising demand. This is because it become more expensive to drill for each drop of Oil or to extract each piece of metal plus the fact that exploration budgets are slashed all over the world resulting in fewer resources from the grounds are found. Read more...