Commodities are raw physical stuff: oil, natural gas, gold, copper, wheat, coffee. Unlike a stock, a barrel of oil doesn't grow earnings, pay dividends, or hire a better CEO. Its price is set purely by supply and demand for the stuff itself — and that single difference drives everything else in this chapter.
Commodities matter to stock investors for two reasons, even if you never trade one. First, they're inputs: oil prices flow into airline costs, copper into builders' budgets, wheat into food companies' margins — and Canada's stock market in particular is heavy with energy and mining companies. Second, commodity prices are macro signals in their own right. Copper is nicknamed Doctor Copper, because industrial demand for it tends to track the health of the global economy.
Fair warning up front: commodity prices are famously violent. Oil has doubled and halved within single years. Whatever role commodities play in a portfolio, it's rarely a calm one.
Almost nobody who invests in commodities takes delivery of the goods. Trading happens through futures contracts: standardized agreements to buy or sell a set amount — 1,000 barrels of oil, 5,000 bushels of wheat — at a set price on a set future date. Futures were invented so farmers and buyers could lock in prices ahead of harvest; speculators and investors joined because the contracts made price exposure possible without warehouses.
Two practical wrinkles matter. Futures involve leverage: you post a deposit called margin, a fraction of the contract's value, so gains and losses are amplified relative to the cash you put up. And contracts expire. An investor who wants continuous exposure must roll — sell the expiring contract and buy a later-dated one, over and over.
The current cash price for immediate delivery, by the way, is called the spot price — the number you see on the news. That rolling detail sounds like plumbing. It isn't. It quietly determines much of what commodity investors actually earn, which brings us to two odd words you need.
At any moment, contracts for different delivery months trade at different prices. Plot them and you get the futures curve.
Contango means later delivery costs more than sooner — say oil for next month at $70 and for six months out at $75. It's the usual state for commodities that must be stored, since prices for later delivery tend to reflect storage and financing costs. Backwardation is the reverse: later delivery is cheaper, which typically signals the stuff is scarce right now, and buyers will pay a premium for immediate supply.
Why care? Rolling. In contango, each roll sells a cheaper expiring contract and buys a pricier later one. Do that month after month and returns bleed away — the roll cost — even if the headline spot price goes nowhere. In backwardation, rolling works in your favor. This is why a commodity fund can badly trail the price you see on the news: in 2020's extreme contango, some oil funds lost most of their value even though spot oil eventually recovered.
Gold is the commodity people feel strongest about, so let's be unsentimental. Gold's long-run real return — meaning after inflation — has been modest. In Jeremy Siegel's well-known data reaching back to 1802, a dollar of gold grew to only a few dollars of real purchasing power over two centuries, while a dollar in stocks compounded into the millions. Gold has roughly kept up with inflation over very long stretches; it hasn't built wealth the way productive assets have, because it produces nothing while you hold it.
What gold has done is shine in specific storms: the inflationary 1970s, the 2008-2011 crisis years, the early 2020s. It's a form of insurance against extreme outcomes, and insurance has a cost. After peaking around $850 in January 1980, gold didn't trade that high again for 28 years — and in inflation-adjusted terms the wait was longer still.
Reasonable investors disagree about whether a small gold allocation earns its keep. What history doesn't support is treating gold as a growth engine.
No commodity moves markets like oil. It powers transport and feeds into chemicals, plastics, and food production, so oil shocks reach nearly every industry's costs and every consumer's budget. The 1973 embargo quadrupled prices and helped push Western economies into recession with double-digit inflation. In 2008, oil ran to $147 a barrel by July, then collapsed below $40 by December as the financial crisis crushed demand. And in April 2020, with the pandemic destroying demand and storage tanks nearly full, one US futures contract briefly settled below zero — sellers effectively paying buyers to take oil. Commodity markets can do things textbooks never imagined.
The stock market connections run in both directions. Energy producers and oil-heavy markets like Canada's TSX tend to benefit when oil is strong, while airlines, shippers, and consumers suffer — and vice versa. And a fast oil spike raises inflation, which pressures central banks toward higher rates: the gravity from earlier chapters. Watching oil is watching a live feed of global supply and demand.
The case for: commodities sometimes zig when stocks zag, and they've had streaks of real strength during inflation surges — 1973-74 and 2021-22 — precisely when stocks and bonds both struggled. A broad commodity index fund is the usual vehicle, spreading exposure across energy, metals, and agriculture.
The case against is just as real. Commodities pay no income, so all return depends on price moves and roll effects. Long-run returns on broad commodity indexes have been unimpressive, with brutal decade-long droughts — from 2008 to 2020, broad commodity indexes roughly halved while stocks tripled. And the futures mechanics you now understand mean a fund's return can differ sharply from the commodity's headline price.
There's no consensus answer here. Thoughtful investors hold anywhere from zero to a modest slice, and history doesn't settle the argument. What matters is that whatever you decide, you decide it knowing the mechanics — futures, rolls, contango — rather than from a story about stuff always going up. Stuff doesn't.
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