Since the dawn of ancient civilization, commodity trading has been one of the major methods of investment in the world. Most investors and companies rely on commodities to run their businesses. This is because they are one of the major classes of assets along with bonds and stocks. For those who are interested in it, know-how on how to trade commodities work is vital. In fact, traders can make great profits because of in-depth knowledge of understanding commodities, how trade works and the issues that drive commodity prices.
What is Commodity Trading?
Commodity trading is a method of exchanging basic goods or raw materials with other goods of the same kind. According to the Commodity Exchange Act 1936, most of these goods include those that are extracted from the earth, such as gas, oil, wheat, gold, corn, copper and more. Usually, these commodities are grown, produced or extracted. This method of trading is ideal for those who prefer to analyze the current economic growth or decay around the world.
Whether commodities are related to food, metals or a form of energy, they have a serious impact on everyday life. For example, individuals that drive cars can get significantly impacted by the rising prices of crude oil. A drought on engine oil supply can greatly influence their future driving trips. Similarly, a drought on wheat can be alarming as it is one of the main forms of food supplies in the world. In short, for traders, commodities are hard assets that can be traded every day and can have a major impact on their profits.
Types of Commodities for Investment
Tradable commodities are the goods that can be extracted, grown or produced from the earth. They fall under four categories:
- Agricultural: These goods can include food crops (e.g., wheat, soybeans, rice, corn, coffee, cocoa, sugar, and cotton), industrial crops (e.g., wool, rubber, and lumber) and livestock (e.g., hogs, pork bellies, and cattle)
- Metals: They include precious metals (e.g., silver, copper, gold, and platinum) and base metals (e.g., zinc, iron, tin, nickel, and steel)
- Energy: Goods that come under this category include crude oil, natural gas, heating oil, ethanol, gasoline and electricity
- Environmental: Products such as renewable energy and carbon emissions
The main reason why commodities are volatile is because of the demand and supply of economics. For example, during winter, the price of natural gas tends to go up due to the increased demand for heating. Similarly, during summer the demands for natural gas go down due to less need.
While some goods such as oil, crops, and gas tend to be more volatile, other commodities sustain more stability. This can be referred to as gold, which is usually the most preferred buffer for both individuals and investors.
What are some of the Popular Commodities to Trade?
Usually, traders tend to concentrate on one or a few goods for trading. This can be logical as they can focus on understanding more about that specific kind of trade and all the quirks in it that are often missed by traders. This is why it is important to stay in touch with the current trends of commodity trading. Some of the popular commodities include:
This resource is one of the most utilized existence as it is one of the popular sources of fuel for countries around the world. In fact, the shift in the price of this oil can heavily impact political events, depending on the supply and demand.
In recent years, the price of oil has been significantly dropping. According to statistics, the price per barrel went as high as $115 in 2014. However, it is now fluctuating around $50 per barrel. This sudden drop was mainly due to the recent spread of coronavirus in many regions. China has reportedly had to cut down the prices to half due to the spread of the virus and travel restrictions. However, rates could once again rise when this outbreak ends.
Known as one of the easiest traded commodities, Gold has its reputation of being a ‘safe bet’ when it comes to investing in the trade market. Mainly because its core value rarely reduces and neither its market value.
One of the best parts of investing in gold is that it performs very well in times of global and economic crises. Since these events often happen to many countries, gold often rises in value. This is why many traders and investors find gold to be a good commodity.
Base metals such as copper, aluminum, lead, and zinc are some of the popular metals for trading. Moreover, just like crude oil, it is widely purchased across the globe. While copper and lead are the commodities that are vastly used for the making of coins and stationary, zinc and aluminum are widely used for the making of a ship and car parts.
One of the best things about investing in sugar is that it acts as a good resource, as it is a soft commodity and its harvesting can be affected by the weather. Moreover, since it is considered to be ranked as an undervalued class of commodity, it has become a well-known option for investors.
Since sugar is widely used in the making of multiple foods, beverages, and other items, it has become quite popular in recent years. While beverages like Pepsi have been selling for nearly centuries, items like chocolate and snack items have greatly contributed to its popularity.
Known as one of the most consumed beverages around the globe, coffee is a popular choice for investment for traders. Arabica and Robusta are two types of this beverage that exist in the current market and are widely exchanged.
In 2014, countries from Southeast Asia and Africa began to produce and sell coffee, which contributed to a significant drop in prices around the world. While each type of coffee bean can affect the market prices differently, each one can fall in and out of trend. Crop success for this commodity can naturally have an impact on the market value.
Known as one of the main sources of life, water is one commodity that can never go wrong when it comes to investing in it.
It is the main ingredient for the production of multiple items that are used in everyday life. Products like wine and chocolate need a lot of freshwaters to get manufactured. Traders and investors can invest in water in three ways:
- Purchasing the rights to a water-producing company
- Buying farmlands that are rich with water
- Investing in water ETFs or water stocks
Just like any commodity, the less your consumers have, the more value it will receive and more profits can be produced. The same is the case with water, making it one of the most precious resources in the world.
While it is essential to understand what commodities are and what impact they have on the global and local markets, investors need to stay aware of the current market trends. Besides, there is a wide range of commodity investments for experienced and even novice traders to consider. While some commodities may be risky to invest in, others provide stability and a consistent source of profit.