Investing in Commodities: Diversification or Hedging?

Why invest in commodities? One of the main reasons to invest in commodities is the diversification of one?s portfolio, which normally would include mainly investments in stocks and bonds. It is taken for granted by the investor community that there is no correlation between the price of stocks and bonds and the price of commodities, and therefore the investment in commodities serves as a real diversification tool. However, in case there is a negative correlation between the price of stocks and bonds and the price of commodities, which means they are going in opposite directions, investing in commodities could also serve as a hedging tool, protecting from declines in the equity market and the bond market.

In order to find out which kind of correlation exists or does not exist between the price of stocks and bonds and the price of commodities, we have conducted a thorough study to investigate the correlation in the last 50 years: this period has been divided in 5 year periods, and the correlation for each period has been checked. Some results of the study appear in the tables below, and it is shown that results differ from period to period

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