Commodities and Precious Metals

Physical goods and metals are some of the oldest traded assets in the world. Unlike stocks and bonds, they derive value from tangible supply and demand rather than corporate earnings or interest payments.

What Are Commodities?

• Commodities are physical goods; standardized futures contracts on those goods trade on regulated derivatives exchanges
• Three major categories:

• Traded primarily through futures contracts on exchanges like the CME Group and ICE (Intercontinental Exchange)
• Commodity prices are driven by supply and demand, weather events, geopolitical developments, and currency fluctuations

Who Regulates Commodities?

• Commodity futures and options are regulated by the Commodity Futures Trading Commission (CFTC), not the SEC
• This is a critical regulatory distinction: the SEC oversees securities; the CFTC oversees commodity futures and options (not cash purchases of the physical commodity itself)
• Physical commodities are not securities by default. A commodity-related security (like an ETF that holds commodity futures) is a security because the fund itself is a security, not because the underlying commodity is

Commodity Pools

• A commodity pool is a fund that pools investor money to trade commodity futures and options
• The commodity pool operator (CPO) generally must register with the CFTC, unless an exclusion or exemption applies

Think of it this way: A commodity pool works like a mutual fund for futures and options. Investors contribute money, and the pool operator makes trading decisions.

Hedging vs. Speculation

• Hedging: Producers and consumers use futures to lock in prices and reduce risk
  • An airline buys crude oil futures to protect against rising fuel costs
  • A farmer sells corn futures to guarantee a price before harvest
• Speculation: Traders who take positions to profit from price movements without any underlying business need

Exam Tip: Gotchas

• The CFTC regulates commodity futures and options, not the SEC. If a question asks which agency oversees commodity futures trading, the answer is the CFTC.
• Commodity-related securities (like ETFs that hold commodity futures) ARE regulated by the SEC because the ETF itself is a security.

What Are Precious Metals?

• The four primary precious metals: gold, silver, platinum, and palladium
• Often considered a hedge against inflation and currency devaluation
• Gold is traditionally viewed as a "safe haven" asset during economic uncertainty and market turmoil

Ways to Invest in Precious Metals

Key Characteristics

• No income generation: Physical precious metals pay no dividends or interest; returns depend solely on price appreciation
• Storage and insurance costs: Physical holdings require secure storage and insurance, which reduce net returns
• Transaction costs: Buying and selling physical metals involves dealer markups and shipping costs
• Physical precious metals are NOT securities; ETFs and mining stocks ARE securities

Exam Tip: Gotchas

• Physical gold bars and coins are NOT securities. But a gold ETF IS a security. This distinction is frequently tested.
• If you see "physical" precious metals, think not a security (owning bullion isn't a CFTC-registered activity either; it's simply outside securities regulation). If you see an ETF or mining stock, think SEC/security. If you see a futures contract, think CFTC.

What Should You Check on Exam Day?

• The CFTC, not the SEC, regulates commodity futures and options
• A commodity pool operator (CPO) generally must register with the CFTC, unless an exclusion or exemption applies
• Hedging locks in a price to reduce risk; speculation seeks profit from price movement alone
• Physical precious metals (coins, bars) are NOT securities
• Precious metals ETFs and mining company stocks ARE securities, SEC-regulated
• Physical precious metals generate no income; returns come only from price appreciation