Technical University Munich Commodities as an Asset Class - risklab

2.1 The different Commodity Types
terms of another countries currency. 4 Exchange rates are determined by incomes
and relative prices. Commodities, as real assets, typically rise in price when the
currency in which they are quoted depreciates in value and although commodity
markets grow globally, the main trading currency is still the US dollar. The US
government has built up a massive account deficit which is caused by imports outweighting
exports. Higher imports than exports cause an over supply in US dollar
and an over demand of foreign currency what weakens the value of the US dollar
and rises commodity prices.
The introductory words uncover the major characteristics in commodity markets.
The prices are driven by current and expected future supply and demand equilibriums.
In Section 2.1 we will give a more detailed inside into the three major
commodity groups energy, metals and agricultures. It will become clear that the
single elements of the groups follow their own risk factors although technological
improvements enable substitutions. Because our main purpose is the analysis of investable
commodities we only include commodities that are traded at an exchange.
When it comes to commodity investment, we need to understand the interaction of
the different market participants and their trading motivations. This is discussed in
Section 2.2. We close the overview of commodity markets with a brief summary of
the different financial vehicles enabling commodity investments in Section 2.3.
2.1 The different Commodity Types
Commodity markets are divided into three major groups: energy, metals and agricultures
as it can be seen in Figure 2.1. Into the energy group account all products
which can be used to produce electricity, heat and fuel. While coal drove the industrialization
through the 18th and 19th century, the commodity was substituted by
oil since the beginning of the last century. Today’s high price environment drives a
new substitution wave into alternative energy sources. Because crude oil and natural
gas account for around 60% of word’s energy usage we will discuss them in
Section 2.1.1 more detailed.
Appendix B.1 and B.2 will further give a detailed analysis of crude oil downstream
products heating oil and gasoline. It is provided to get a deeper understanding of
the use impact, oil has to our daily life.
4 See [Sawyer Sprinkle 2003].
5