A global poll by Bloomberg has found that commodities are now the preferred investment during the next year.  Bloomberg users were asked which asset class will offer the highest returns and the lowest and the majority voted for commodities; in a July poll, users believed stocks offered the best returns.  The change follows a 27% increase in the UBS Bloomberg Constant Maturity Commodity Index and a smaller 17% gain in the S&P 500 Stock Index since that July poll.

Real estate and bonds also switched positions in the ranking of which asset class would offer the lowest returns. In July, 40 percent said real estate would rate last while 29 percent said bonds. This week’s poll showed 40 percent cited bonds and 24 percent real estate.

The poll of investors and analysts on six continents was conducted Oct. 23-27. It was based on interviews with a random sample of 1,452 Bloomberg subscribers, representing decision makers in markets, finance and economics. The poll had a margin of error of plus or minus 2.6 percentage points.  Source

The futures and commodities markets are two vital parts of the investment world but represent two very different things altogether. Commodities markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. The futures market is an auction market in which participants buy and sell future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit.

A commodities market serves the purpose of allowing two individuals to exchange the rights to goods without visual inspection. Commodity markets require the existence of agreed standards opposed to spot markets where delivery either takes place immediately, or with a minimum lag and normally involves visual inspection of the commodity or a sample of the commodity. A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today (buy now, pay later). Forward contracts have evolved and have been standardized into what we know today as futures contracts.

A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities – remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods.

That is why futures are used as financial instruments by not only producers and consumers but also speculators. The futures market allows buyers and sellers an opportunity to manage price risks for goods they will either need to purchase or sell at a later date. An example is Boeing utilizing the futures market to hedge against an increase in the cost of aluminum at a later date which is a major component in the manufacture of an aircraft (i.e. hedging).Unlike a stock, which represents equity in a company and can be held for a long time, if not indefinitely, futures contracts have finite lives.

Here is an an article about the commodity indices and it shows different commodity index group.One can also understand how various these various set of indices are calculated in accordance with specific set of rules set by the financial institution.

A commodity index is calculated in accordance with a specific set of rules defined by the financial institution that is maintaining the commodity index. A commodity index is calculated by applying percentages to the price of each commodity group it includes. Depending on the commodity index, those percentages are based on liquidity, production, and/or how significant a commodity subgroup is in the world economy . We’ll use Goldman Sachs’ Commodity indices as an example. Goldman Sachs has three different commodity indices; the S&P GSCI Total Return Index, the S&P GSCI Spot Index, and the S&P GSCI Excess Return Index.

The S&P GSCI™ Total Return index measures the returns accrued from a fully collateralized commodity futures investment that is rolled forward from the fifth to the ninth business day of each month. Currently the S&P GSCI™ includes 24² commodity nearby futures contracts. The S&P GSCI™ Total Return is significantly different than the return from buying physical commodities. In fact, the total return (i.e., the return on the S&P GSCI™ total return index) is the measure of commodity returns that is completely comparable to returns from a regular investment in the S&P 500 (with dividend reinvestment) or a government bond.

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The S&P GSCI™ Spot index tracks the price of the nearby futures contracts, not returns available to investors. At the end of every business day, the S&P GSCI™ is composed of the same proportions by weight of the underlying commodities and expirations as the portfolio represented by the S&P GSCI™ Excess Returns. Most important, the S&P GSCI™ Spot index cannot be compared directly with the S&P GSCI™ Total Return index. For example, you cannot simply add T-bills to the spot return in order to draw a comparison with the S&P GSCI™ Total Return. In fact there is nothing you can do to make a direct comparison between the Spot and Total Return indices because they are measuring two very different kinds of investments.

Meanwhile, the S&P GSCI™ Excess Return measures the return from investing in nearby S&P GSCI™ futures and rolling them forward each month (on the fifth to ninth business days of each month), always keeping your investment in nearby futures. This is a leveraged futures investment.

The S&P GSCI™ Excess Return (unlike the S&P Excess Return ) is not the return above cash. The S&P GSCI™ Excess Return cannot be compared directly to the S&P GSCI™ Total Return, either. The S&P GSCI™ Excess Return plus T-bills does not equal the S&P GSCI™ Total Return because it ignores the impact of the re-investment of T-bill collateral yield gains back into commodity futures, and gains (losses) from commodity futures back into (out of) T-bills. The excess return index measures the returns accrued from investing in uncollateralized nearby commodity futures.

Our team has come up with an article about the modernization act which was passed to resolve a dispute concerning jurisdiction over securities-based derivatives and also focusses on the major areas like individual securities, future contracts etc.

The Commodities and Futures Modernization Act of 2000 was passed on December 21^st 2000 in order to effectively repeal the Shad-Johnson Jurisdictional Accord. In order to fully understand the meaning and underlying reasons for the Commodities and Futures Modernization Act of 200, one must understand what exactly the Shad-Johnson Jurisdictional Accord was.

The Shad-Johnson Jurisdictional accord, which was passed in 1982, was an agreement reached between the Chairmen of SEC and CFTC in 1981 to resolve a dispute concerning jurisdiction over securities-based derivatives. Under the accord, CFTC retained exclusive jurisdiction over all futures contracts, including futures on securities-based indexes and options on futures and physical commodities. Futures and options on futures on securities indexes were allowed only for contracts settled in cash, not readily susceptible to manipulation, and derived from a substantial segment of a publicly traded group or index of equity or debt securities, called broad-based indexes.

The major area of focus of the accord was that futures contracts on individual securities, other than exempted securities (such as U.S. Treasuries), were prohibited by the accord. The CFTC chairman who negotiated the accord stated at the CFTC reauthorization roundtable that the accord was intended to ban certain stock-based futures until issues of concern to SEC could be addressed. According to the legislative history, the SEC was concerned that the regulatory scheme governing futures trading did not mirror securities regulation in important areas such as insider trading prohibitions, customer protections, floor trading rules, and margin requirements.

The Commodity Futures Modernization Act was passed to “settle” the dispute of which body would have jurisdiction, CFTC or SEC, over an instrument that had features of a stock and of a commodity (i.e. a future on an individual security).

The Commodity Futures Modernization Act of 2000 had a companion bill which was labeled as the “Enron loophole”, because it exempts most over-the-counter energy trades and trading on electronic energy commodity markets. The “loophole” was drafted by lobbyists for Enron who were working with senators. Therefore, this act first gained attention as it was partially blamed for the fall of Enron.

What this Act really did was open the door to unregulated trading of credit default swaps which, in-part, led to the failure of Lehman brothers, the massive loans to American International Group (AIG), and the current economic crisis.

On June 22, 2008, the Senate proposed the repeal of the “Enron loophole” as a means to curb speculation on skyrocketing oil prices.