We live in a commodified world.
From wheat, iron ore, precious metals, oil, natural gas, you name them.
These are all commodities.
These are nature’s extracts.
Essential commodities are the foundation that glues every joint, enabling the global economy to tick.
Commodities command billions if not trillions of dollars. They prime every facet of the traditional financial system, presenting opportunities that opportunistic investors can profit from the ever-changing prices of assets.
Accordingly, a prospective investor, irrespective of trading experience, aware of lucrative opportunities availed by this market segment, can find valuable gems in this beginner’s guide to commodity trading.
What is a commodity?
So, what exactly are commodities, especially from a regulatory perspective?
Commodities are raw materials used to produce finished goods.
Aforementioned, commodity as a classification is broad, ranging from agricultural products, minerals, and more.
Unlike other financial products such as bonds, commodities exist in physical form and are drawn directly/indirectly from nature.
There are four main types of commodities available in the traditional financial market. They include:
- Livestock like cattle and hog, tradable in bourses
- Energy sector comprising renewable energy sources like solar and wind and fossil fuels like oil, natural gas, and more.
- Agriculture consists of edible goods like coffee and non-edible products like cotton or rubber.
- Metals like gold and platinum as well as industrial elements like Zinc and copper.
Factors Influencing the Commodities Market
Compared to nascent digital products like cryptocurrencies and tech stocks, exposure to certain commodities presents certain advantages for traders and investors.
Gold, one of the most noticeable commodities and precious metal, is held by central banks as reserves. The commodity has served, over centuries, as a store of value.
However, since its price—like any other asset tradable in the market is influenced by supply and demand, there is fluctuation, meaning more profits for traders and investors.
Measures taken by governments can directly influence market forces, impacting the prices of gold and other commodities.
For example, in times of political and economic turmoil, like the COVID-19 pandemic, store-of-value assets posted sharp gains.
Meanwhile, due to lockdowns as a form of contagion, the price of hog spiked in response to expected demand.
But triggers are not always financial or monetary-based.
The price of bacon and pork, especially in reliant countries like China, tends to be affected by events in other countries and continents. Whenever there is an outbreak of swine flu in supplying countries, pork prices rise.
Another example can be the rise in the increasing popularity of electric cars and the clamor of going green.
The unexpected high demand for these products means the need for more sophisticated and complex high-capacity batteries which use Cobalt as their core element. Various reports project the demand for Cobalt to remain high throughout 2021 and years to come.
Driven by high demand in the EV sector, the industry used over 120k tonnes of Cobalt in 2020 to post a strong finish. The trend is expected to spill over to 2021, where Cobalt demand may rise another 13 percent.
Given the importance of commodities in our daily lives, traders can formulate different strategies fitting their profiles to trade commodities profitably.
For the opportunities therein, commodity trading has exploded in popularity as traders pour in to take advantage of various iterations of commodities. Furthermore, commodity markets are deeper and more sophisticated consisting of global exchanges open to an international clientele.
Typically, commodity traders trade futures contracts but are free to exchange physical goods, the stock of the company involved in the commodity, or even its derivatives like an ETF or an ETN.
Using these contracts, a trader can make bets on the future price of the underlying commodity. If they think the price of, say, coffee will go up, they will buy the commodity’s future prices—or go long.
On the other hand, if their analysis suggests that the commodity price will slide, they will sell off the future contract’s—or go short.
Should you trade commodities?
Commodity trading is open to retailers.
Just like any other form of trading, a trader is required to have a thorough understanding of influencing fundamentals and price charts.
A trader should implement a tested trading plan, integrate risk management strategies, and be disciplined.