Other commodities, and why individuals mostly should not

Gold is the exception among commodities, and this chapter is about why the rest are a different proposition.

Why gold is the exception

Three properties gold has and crude oil, copper and wheat do not:

It does not perish or degrade. A bar is unchanged in fifty years.

It is dense in value. A meaningful holding fits in a small box, so storage is cheap relative to value.

It has a monetary history. Central banks hold it; it has functioned as money. That gives it a demand base unrelated to industrial use.

Those three are why a retail investor can own gold directly — and why instruments exist, including one that, as RBI puts it, means "the risks and costs of storage are eliminated."

No equivalent exists for a barrel of oil. You cannot take delivery, you cannot store it, and nobody will issue you a bond denominated in barrels.

So exposure means futures

For almost every other commodity, exposure runs through futures contracts — agreements to buy at a fixed price on a fixed date. The Derivatives subject covers the mechanics; three consequences matter here.

They expire. A futures contract has a date. To maintain exposure beyond it you must close the expiring contract and open a later one. That is rolling, and it is not free.

They are leveraged. You post margin, not the full value, so moves are amplified in both directions and a position can be closed out against you before your view is tested.

They are priced against a curve, not a spot price. The later contract has its own price, which may be above or below the one expiring.

Roll cost, which is where the money goes

This is the mechanism that defeats most long-term commodity positions, and it deserves to be stated precisely.

Suppose the expiring contract is at ₹100 and the next one is at ₹103. To maintain exposure you sell at ₹100 and buy at ₹103. You now hold the same exposure and have lost ₹3 of value, not because the commodity moved but because the curve sloped upward.

That shape — later contracts dearer — is called contango, and it is common in commodities with real storage costs, because the forward price reflects the cost of carrying the physical goods until then.

Repeat that roll monthly or quarterly for three years and the drag compounds. A position can lose money over a period in which the commodity's spot price rose, purely from rolling.

The opposite shape, where later contracts are cheaper — backwardation — produces a roll gain. It occurs, but you cannot count on it, and which regime prevails is not something an individual can forecast.

The honest summary: in a commodity futures position, the thing you are betting on is not only the price but the shape of the curve, and most retail buyers do not know they have taken the second bet.

What that means for the products

Commodity ETFs and funds that hold futures inherit the roll cost. Their tracking of the spot price can diverge substantially over years, and the divergence is not a defect in the fund — it is the cost of maintaining exposure to something that cannot be stored.

Read what any commodity product actually holds. Physical metal, futures, or shares of producing companies are three different exposures. Producer shares bring company risk — management, debt, reserves, governance — which is not commodity exposure at all, though it is often sold as such.

The narrow cases where it makes sense

You are hedging a real exposure. A business that buys copper has a genuine reason to lock a price. That is what the market is for, and it is a hedge rather than a speculation.

You want broad diversification within a large portfolio, accept the roll cost, and are sizing it small.

Neither case describes most individuals, and the reason is not that commodities are disreputable. It is that the instrument imposes costs and a time limit that a household investor has no way to overcome, in a market where the counterparties are producers, consumers and specialists with information you do not have.

One regulatory note. A product sold to an individual without regard to whether it suits them engages the mis-selling limb discussed in Ethics and regulation: not taking reasonable care to ensure suitability is a defined unfair trade practice, and it does not require anyone to have lied. A leveraged commodity derivative sold to a retail buyer on a price view is close to the paradigm case.

Working the problem

Confident crude will be higher in three years.

Why you can be right and still lose. You cannot hold a three-year position in a single contract — you must roll, perhaps monthly. If the curve is in contango, each roll sells the cheaper expiring contract and buys the dearer next one, losing the difference each time.

Suppose the roll costs 1% a month. Over 36 months that is a drag of roughly 30% against your position. Crude could be 25% higher in three years and you would still be behind, having had exactly the view that came true.

And leverage can end it early. Margin means a sharp move against you can trigger a call or an involuntary close-out well before the three years are up. Being right eventually is worth nothing if the position does not survive to be right, which is the Financial institutions subject's forced-selling mechanism applied to a household.

What I would do instead:

First, ask what the view is really a view about. "Oil will be higher" is often a proxy for a belief about inflation, geopolitics or the rupee. If so, address that directly — chapter 5 showed the currency leg is reachable through gold, and inflation through instruments linked to Indian rates.

Second, consider the equity route, with eyes open. Shares of energy producers give exposure to the oil price and to company-specific risk. That is not a clean expression of the view, and it should be chosen knowingly rather than as a substitute people assume is equivalent.

Third, size it as a speculation. If the view is held strongly and expressed through a derivative anyway, it belongs in the small, ring-fenced portion the Designing around yourself chapter describes — money whose complete loss changes nothing.

Fourth, and most likely correct: do nothing. A three-year directional view on a commodity, expressed through an instrument with a structural drag and a margin requirement, is a bet on being right about both the price and the curve while remaining solvent throughout. The SEBI derivatives data in the Behavioural finance subject — 91% of individual traders losing money, stable across four years — is the empirical answer to how that generally goes.

The point

Gold is the exception among commodities because it does not perish, is dense in value, and has a monetary demand base — which is why it can be held directly and even in a form where storage risk disappears. Everything else is reached through futures, which expire, are leveraged, and are priced along a curve, so maintaining a long position means rolling and paying the difference each time. In contango that drag compounds, and a position can lose money across years in which the spot price rose. The result is that a correct view can produce a loss, which is why commodity exposure suits hedgers of real exposures and large diversified portfolios, and almost never an individual with a price opinion.