Investing in Commodity Trading: A Guide to the Future
Discover the benefits of investing in commodities. Learn about the different types of commodities, risk management, inflation protection, and leverage. Explore opportunities for financial returns in the dynamic commodity trading market.
The term ‘commodity’ refers to those base materials or goods that are used in the manufacture of the things we use every day. Thus commodities are copper, silver, gold and oil, to name just a few examples.
Trading in commodities of this sort is just one of the many types of investment that takes place within the global financial markets. However, there are specific exchanges in different parts of the world that are used for commodities trading.
Furthermore, the value of commodities is not dependent on geographical factors. So ones produced in Yucatan can have the same worth as ones from the US or China.
Commodities Trading Explained
Although lots of different raw materials come under the heading of commodities, they can be divided up into three categories:
- Metals
- Agricultural
- Energy
Those in the first category are classed as hard commodities, while those in the others are soft commodities. Both are of central importance to the economies of countries around the world though.
There are plenty of very good reasons why trading commodities is something that a potential investor should look to start doing right now. The volatility of commodities prices can create a lot of openings for investors.
They are also a useful way of diversifying an overall investment portfolio. Their prices are rarely affected by market shifts in the price of bonds, shares and other investment asset classes.
That means putting money into gold, copper or another commodity can lower your overall risk level.
Furthermore commodities can be a smart method of protecting an investment portfolio against the devaluing effects of inflation. High levels of inflation lead to currencies declining in value, which can have a devastating effect on investors, but the prices of commodities frequently rise in value when inflation is high.
Factor in the potential to maximize the return on quite a small investment by deploying leverage and you have an attractive investment prospect. Leverage means borrowing funds so that you can trade in more expensive commodities than you would otherwise be able to afford.
It is a high risk trading strategy, but also holds out the promise of potentially significant financial returns for those bold enough to pursue it.
The exchanges for commodities trading include the Chicago Mercantile Exchange (CME) and London Metal Exchange (LME). They are open almost all of the time and it is possible to invest in commodities using anything from cash to stocks, exchange traded notes (ETNs) or exchange traded funds (ETFs).
The Growth in Commodities Trading
Trading in the area of commodities has experienced quite substantial growth during the past half decade. Every sector has its spells of growth and contraction, with that process often considered to be a cyclical one.
However, experts in the investment markets regard the expansion in commodities trading to be something more long-term and robust than those standard industry cycles. In 2018, the value of the commodity trading industry was $27 billion, whereas it had almost doubled to $52 billion by 2021.
This was primarily driven by trading in the soft commodity energy category, as trading in oil rose by over 90% to hit $18 billion. It was not just oil though, as gas trading more than doubled in that three-year period to reach $13 billion.
Future Prospects
While experts are mostly quite optimistic in their predictions for the future of the commodities market, there are issues that could create problems. The growth in this area of trading has depended on the flow of commodities around the world continuing without anything causing a breakdown.
However the pandemic that dominated much of 2020 and 2021 proved to be an example of the sort of unforeseen event that can damage these flows. It led to a collapse in global oil demand, which in turn saw the price of crude oil in the commodities markets fall dramatically.
The price of oil is now recovering but is not expected to go back to the level it was at before the pandemic in the near future. Events such as that and the war in Ukraine have also see a change in the worldwide flow of commodities, with Western countries now seeking resources like oil and gas from places like the Middle East, West Africa and Latin America.
Thus the future for commodities is unpredictable, but they have always been a volatile trading option.
Commodity trading is growing right now and worth serious consideration but investing caution must also be applied.
