Introduction into

commodities
Commodities are unprocessed physi-
cal goods that result from mining,
drilling, or agriculture. For investors,
commodities offer attractive potential
returns and diversification, and are
often used as a tool to hedge against
inflation.

What you should know about commodities Your needs

commodities traded on exchanges, and non-traditional or new ȷ You want to diversify your portfolio in order to improve the
markets, which are only accessible via indirect investments such
risk-return profile.
as equities. Despite the great variations between the individual
commodities, all of their markets are determined by supply and ȷ You want to hedge against inflation.
demand. Since they have a relatively low level of correlation with ȷ You want direct exposure to global economic growth.
traditional investments such as stocks or bonds, commodities
can improve the risk-return profile of a traditional portfolio. ȷ You are looking for investment opportunities beyond traditional
stocks and bonds.
Commodities prices are influenced by the following factors:
ȷ Performance in the areas of economic growth, interest rates, Your benefits
and inflation. ȷ Direct exposure to global economic growth.

ȷ Changes in inventory or availability. ȷ Both the returns and risks involved in commodities are largely
independent of those of bonds and equities. This makes it
ȷ Developments with regard to the transaction currency and
possible to improve the return-risk profile.
trade regulations.
ȷ Commodities can be used to hedge against inflation, currency,
ȷ Weather conditions, natural catastrophes, and climatic change.
and geopolitical risks.
ȷ Geopolitical risks. ȷ Gold plays an important role when it comes to diversification
in times of volatile and uncertain markets.
ȷ There is no counterparty risk involved in investments that are
physically deposited.

Important: Please note that the explanations in small print on page 4 also apply to this page.
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Your risks Characteristics and categories
ȷ Commodity investments may be subject to major fluctuations in Commodity prices are determined primarily by supply and
value. demand. In simplified terms, commodity prices rise with scarcity,
whereas a surplus results in falling prices. The prices of soft
ȷ The cyclical nature of commodities may impact the portfolio.
commodities also depend on weather conditions. Hard commodi-
ȷ Possible counterparty risk involved in certain forms of ties, however, depend more on the business cycle. At the same
investment. time, seasonal effects play an important role in all markets. For
example, the demand for heating oil rises sharply in the winter,
ȷ Prices react to interest rate changes and fluctuations in the
while agricultural markets are dependent on seeding and
foreign exchange market.
harvesting cycles.
ȷ Investments in futures or OTC derivatives may result in higher
margin calls if the derivative performs poorly. Energy – Energy commodities such as oil and natural gas are
used to generate energy and chemical raw materials. Global
ȷ Physical settlement may result in high costs.
energy consumption has more than doubled in the last 40 years.
ȷ Liquidity may be limited under extreme market conditions. Oil remains one of the most important energy sources. Over
50% of global oil reserves are located in the Middle East, which
ȷ A lack of transparency can be a problem in certain commodity
is therefore a major exporter of oil, while the US and China are
markets, making analysis difficult.
significant importers. Energy is highly dependent on global
economic growth but is also sensitive to geopolitical events.
Commodities as an investment option
Commodities are natural resources that are produced from Precious metals – Gold, silver, platinum and palladium are
mining (e.g. precious metals and industrial metals), drilling (e.g. the most important precious metals. Regarding the demand
oil or gas), or agriculture (e.g. corn or cotton). Commodities are for precious metals, a distinction is made between the physical
traded daily on futures markets around the world. Their long- demand (industry and the jewelry trade) and the demand for pre-
term correlation with stocks and bonds is low because they have cious metals as an investment (investor demand). The physical
their own cycles and influencing factors. Commodities are often demand depends above all on economic growth, while investor
used as a tool to hedge against inflation. Because commodities demand is based on interest rate developments, currency fluc-
are generally traded in US dollars, they also offer a certain level tuations (mainly the US dollar because of the high trade volume
of protection against phases of weakness in the dollar. Precious in US dollars), and the level of inflation. In addition, gold is an
metals also have a special role to play here because they are attractive investment in times of market uncertainty, although
traded in a similar way to currency pairs. Commodity investments it must mentioned here that even gold does not offer complete
offer a high level of potential for diversification and are a good protection in times when the economy is under pressure from
way to reduce the overall risk within a portfolio, without having debt.
to accept long-term losses in your potential returns.
Industrial metals – Aluminum, copper, nickel, zinc, lead and tin
Commodities may be roughly divided into two categories: are well-known industrial metals. Industrial metals, which are
traditional markets and non-traditional, or new, markets. also known as base metals, are non-ferrous metals. Their main
ȷ Traditional commodities are traded on exchanges within applications are in highly cyclical economic sectors such as the
standardized contracts and are directly accessible to investors. automotive, aviation, and construction industries. Early economic
These include all of the markets listed in Figure 1. indicators are therefore crucial in the development of prices.
China is the main consumer of industrial metals, meaning that
Figure 1: Commodity categories Chinese economic data also plays an important role. Industrial
metals are therefore very cyclical in nature and are the commodi-
Hard Commodities Soft Commodities ties that offer the most direct way of investing in China’s eco-
nomic growth and development.
Energy Precious Industrial Agricultural
Metals Metals Products Soft commodities – Unlike fossil commodities, agricultural
commodities are renewable. These include grains such as corn,
Oil Gold Aluminum Soya wheat, and soybeans, cooking oil/oil seeds such as soy and
Heating oil Silver Copper Grains palm oil, and other plants/fibers such as sugar or cotton. The
Natural gas Platinum Nickel Sugar prices are formed from the interaction between supply and
Diesel Palladium Zinc Corn
demand. If the demand outstrips the supply, it becomes neces-
Gasoline Lead Cotton
Tin Coffee sary to fall back on inventories. This means that prices typically
Livestock rise as availability of a commodity decreases, especially if
reserves are tight. Most agricultural commodities are products
Source: Credit Suisse that meet basic needs and are therefore less dependent on
ȷ New commodities are generally either not publicly traded or economic growth than other cyclical commodities. Because
only illiquid contracts exist. These commodities are normally agricultural commodities are renewable, the price cycles are
traded directly by means of contracts between various typically shorter than for hard commodities. The prices of
contracting parties. This means that they are usually agricultural commodities are also dependent on the weather
accessible only through the purchase of shares in the conditions and the availability of water.
companies involved. These include, for example, iron ore,
coal, alternative energies, and diamonds.

Important: Please note that the explanations in small print on page 4 also apply to this page.
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Commodities in a portfolio context dividends or earnings. Instead, investors must pay for the
The advantages to your portfolio of investing in commodi- storage and financing of commodities until delivery. Historical
ties analysis shows that long term returns from commodities are
ȷ Commodities are an opportunity to invest global similar to those of equities.
economic growth – Industrial metals and the energy markets
are of particular importance to industrial production. Ways to invest in commodity markets
ȷ Spot (cash transaction) – The physical commodity is
ȷ Protection against inflation – Commodities are input
bought on the spot, i.e. the investor receives the commodity
factors in important consumer goods. As a result, they play
immediately in exchange for cash. Private investors can
a major role in the consumer price index and can be used
perform cash transactions in precious metals like gold, silver,
as protection against inflation (see Figure 2). Based on
platinum, and palladium. In general, this is not possible for
experience, gold, for example, makes less sense as a hedge
other commodities.
against inflation, but is very promising in the longer term.
ȷ Futures – A common form of investment in commodities is
futures, which are exchange-listed and standardized contracts
Figure 2: Correlation
Correlation based on monthly returns since 2000 for the delivery of a specific quantity of a commodity at a
specific location, on a certain date, and at a specified price.
0.8
Futures are derivatives, and investors first of all need to open
0.7 a margin account in order to be able to trade in them. In
0.6 addition, futures positions must be actively monitored because
0.5 they need to be closed before maturity in order to prevent an
0.4 unwanted physical delivery.
0.3
ȷ Index products – Index products bundle several commodities
0.2
futures, with a wide range of products and strategies available.
0.1
The benchmark indexes generally follow a buy-and-hold
0
Gold Crude oil Dow Jones UBS strategy and hold futures in all commodity sectors. Besides
Total Return the changes in the spot rate, the roll yields and the interest
Correlation with US CPI income have an impact on the index performance. Roll yields
Source: Credit Suisse and losses are incurred when contracts have to be sold before
their maturity dates and the earnings are reinvested in new
ȷ Diversification – Commodities have their own cycles and contracts.
influencing factors and their performance may therefore ȷ Structured products – Structured products provide access
diverge from equities and bonds. Investments in commodities
to commodity markets for investors who are not willing or able
can therefore be used in order to improve the risk-return
to open margin accounts. In commodities trading by a bank,
profile of an existing portfolio (see Figure 3).
commodity derivatives are traded and investable products are
structured for private clients. The counterparty of the private
Figure 3: Risk-return profile
investor is the issuing bank. These products are available for a
Annual expected return (%)
whole variety of underlyings and may contain barriers or other
8.5% clauses.
8.0%
ȷ Funds/exchange traded funds/exchange traded
7.5%
commodities – Fund managers invest the resources they
7.0%
have gathered from investors across the entire commodities
6.5% sector in accordance with the fund prospectus. For example,
6.0% they invest in commodity futures, funds, and also in stocks
5.5% issued by commodity producing companies. There are also
Standard deviation funds with physically deposited commodities and therefore
5.0%
5.5% 6.5% 7.5% 8.5% 9.5% 10.5% 11.5% 12.5% involve no counterparty risk. Fund performance depends on
the investment skill of the fund manager and the restrictions
Equities, bonds, and commodities
stated in the fund prospectus. Exchange traded funds
Equities and bonds
(ETFs) are investment funds that are listed on an exchange
Source: Credit Suisse and are traded in the same way as equities. Most ETFs are
index funds that replicate an equity or bond index. Exchange
How much should I allocate to commodities? traded commodities (ETCs) are also listed on an exchange.
Credit Suisse advises investing a total of 5% in commodities, They provide a cost-effective way of investing in physical
with 2.5% in various commodity markets and 2.5% in gold commodities or in a commodity index based on at least one
(applies to all investment strategies). commodity.
ȷ Equities – Investing directly in equities from commodity-
Differences between commodities and traditional invest-
producing companies makes it possible to invest indirectly in
ment categories
commodities that are difficult to access. The development of
In contrast to traditional investment categories, investors holding
the share price can deviate significantly from the performance
commodity futures have no claim to future cash flows such as
of the underlying commodity.

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Recommendations for investing in commodities Contact us
ȷ A broadly-based commodity portfolio including futures, We will be happy to arrange a personal consultation.
indexes, funds, and equities offers optimal diversification. Call us on 0848 880 844*
For more information, visit our website at:
ȷ A high concentration of investment volume in individual
credit-suisse.com/investments
commodities should be avoided because of the high levels
of volatility and risk. * Please note that telephone calls to our numbers may be recorded. We assume
that, by calling us, you accept this business practice.

CREDIT SUISSE (Switzerland) Ltd.

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