Lesson 5 of 6 · 13 min
Risk and return of natural resources
Commodity prices are set second by second by supply that adjusts slowly and demand that moves with the global economy, giving high return potential with high volatility, while farmland and timberland are valued infrequently, look smooth on paper, and carry real weather, cash-flow, liquidity and global risks.
In short
- Commodity supply depends on production, crop yields and inventories; demand on end users; non-hedging investors can amplify or dampen moves in the short run.
- Supply adjusts slowly (growing cycles, years to build mines and pipelines), so it is too low in booms and too high in slowdowns: prices are volatile.
- Gold is a traditional safe haven and central-bank reserve asset.
- Motives for commodities: return potential, diversification, inflation protection. Historically: higher return than stocks and bonds but much higher volatility.
- Land is appraisal-priced and trades rarely, so it looks less volatile than it is. Risks: low liquidity, negative cash flow from high fixed costs, weather, and global commodity-market exposure. Raw land is riskier still.
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