On the other hand, buying an asset where all you can achieve is the upward movement in prices seems more like speculation. Genuine investors are interested in asset classes that have a risk premium and offer a return, even if the price of the asset does not move upwards.
What is the economic benefit of an allocation of capital to a raw commodity? There is little doubt that providing investment capital for a going concern, and receiving ownership rights through equity or entitlement to an income payment through debt, help job creation, wealth generation and economic growth. The investor is providing the function true investment should: the provision of capital. Buying a commodity does not do the same.
So if the purchase of a non-income-producing commodity, or basket of commodities, does not provide a risk premium, should pension funds and institutional investors be involved? It is an old maxim that when metal prices soar, the companies making the shovels are the ones to make money. Share prices rise in anticipation of higher earnings, and that is where the risk premium comes into play.
The cotton futures contract a speculator has just purchased helps to increase the price and thus the revenue of the farmer. But the speculator is buying a product of the enterprise, not the enterprise itself. Compare this with an investment in the farm itself. Does it do the same good?
This is the root difference between speculation and investment. In many ways, it is the difference between buying shares in Woolworths and shopping there for groceries.
Michael Gordon is global head of institutional business at Fidelity Investments.