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What are Hedging Commodities?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 10 February 2020
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Hedging commodities are physical assets that can provide limited risks with different kinds of trading and futures contracts. Traders and financial managers that use commodities to manage risk are said to be “hedging commodities.” A wide array of commodities work for hedging risks, where vibrant commodities markets offer a lot of different options for traders.

Some experts maintain that hedging commodities goes all the way back to the beginnings of the merger between agriculture and financial markets. Certain historians place the beginning of hedging commodities with markets in the Netherlands or other European areas. The idea of primitive commodities hedging, according to experts, was to protect farmers from losses due to droughts and other unfavorable crop conditions. Since then, the idea of hedging commodities has expanded into financial markets that are relatively unassociated with agriculture per se, or physical crop activities. Instead, many investors speculate on commodities, but they are still, in a sense, using hedging commodities in a direct way.

In today’s financial world, hedging of commodities involves much more than crops. Financial managers can “hedge” precious metals like gold and silver, or even other more complex items that can also be called commodities. At the same time, commodities markets for food products are very much in demand and included in many investment portfolios. Wheat, coffee, and other basic food commodities can also be hedging commodities used in beating various kinds of risk.

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Some financial professionals explain the value of hedging certain commodities this way; investing in commodities can help individual traders beat inflation in their national currencies. As inflation weakens the value of a specific currency, the prices of most commodities will go up accordingly. That means that if a trader has a part or whole of a certain capital allocation in commodities, he or she will realize those gains. Meanwhile, those who have assets in cash form may see devaluation.

Among the many people who hedge using commodities, hedge fund managers employ these kinds of strategies to limit risk while producing gains for investment clients. Whether it’s through an investment partnership or a classic “client-broker” relationship, financial money managers can help relatively unskilled investors to use hedging commodities or other opportunities in order to pursue stable yields on capital. It helps when individual investors understand the nature of the commodities that are in their portfolio, so that they could make good informed decisions about buying and selling commodities or commodities-based equities or securities.

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