Commodities
Oil, metals, grain. Assets that produce no cash — so everything about valuing them is different.
A commodity is a raw material where one unit is interchangeable with another: a barrel of a given crude grade, an ounce of gold, a bushel of wheat.
The fundamental difference
A company earns. A bond pays interest. A property collects rent. A barrel of oil sits there. Its entire return must come from the price changing, which means none of the valuation methods built on future cash flows apply at all.
It also means holding one has a cost rather than a yield — storage, insurance, financing. Time works against the holder.
Spot and futures
- Spot price. What it costs to buy the physical thing today.
- Futures price. What it costs to agree today to buy it on a set future date.
Most investors who want commodity exposure never touch the physical material. They hold futures, or funds that hold futures, which introduces something that surprises people.
Futures expire, so a fund must continually sell expiring contracts and buy later-dated ones. If the later contract costs more — a state called contango — that rolling loses money on every cycle, regardless of what the spot price does. Over long periods this can dominate the result.
Why they are watched
Because they feed directly into inflation. Energy in particular is both a line in the consumer price basket and a cost inside almost everything that has to be transported.
Gold, specifically
Gold is the commodity that behaves least like a commodity, because its industrial demand is small relative to its monetary role. Arguments about its value rest on what other people will pay, which is true of everything but unusually undiluted here — there is no cash flow to anchor the discussion.