Why is investing in a commodity considered risky?

Investing in a commodity is considered risky primarily because the price of commodities can experience significant and rapid fluctuations. Various factors contribute to this volatility, including changes in supply and demand, geopolitical events, weather conditions, and shifts in investor sentiment. For instance, a sudden increase in production due to favorable agricultural conditions can flood the market, causing prices to drop sharply. Conversely, natural disasters can lead to shortages, driving prices up. This inherent unpredictability makes commodities a high-risk investment compared to other asset classes such as stocks or bonds, which may have more stable pricing over time.

The other contexts related to the other options highlight their lack of relevance to the core issue of risk in commodity investing. While it is true that commodities can face regulatory concerns, the degree of regulation varies by market and does not uniformly apply across all commodities. Furthermore, commodities do not always decrease in value over time; their prices can rise significantly, particularly in times of economic stress or inflation, making this statement misleading. Lastly, the volatility of commodities generally surpasses that of stocks, which contradicts the claim that commodities are less volatile. Therefore, the key risk factor lies in the potential for dramatic price changes.