Recently I received an email asking me to explain why commodities are risky assets. "I would think energy and raw
materials would still be in demand, even if Dubai defaults," the writer said.
It's a good point. People need to eat, drink, drive and live. They can't do it without commodities.
But for investors commodities are risky. That is because they mostly invest using commodity futures, which are subject to
wild price swings because they react strongly and immediately to demand and supply news and changing expectations for the future. Since commodities became more popular with investors they have also become highly influenced by market sentiment and macro economic indicators and that's why they have been moving alongside equities.
More investors in commodity futures markets is also why the link between equities and commodities has become much stronger over the past year to 18 months.
But that's an aside. Ultimately commodities are risky because they are volatile. Institutional investors don't like volatility whether its price volatility or return volatility.