Introducing Commodity Trading

Commodity trading exists so that traders can profit from the price fluctuations in materials or products, such as oil and gold. Investors bet on the direction of commodity price movements just like speculators would on stocks or currency markets. Commodities are divided into soft and hard, whereby soft commodities consist of sugar, cotton and wheat; and hard commodities encompass gold and oil. They can be further subdivided into metals, energy, products and livestock.

Benefits of Commodity Trading

Investors use commodity trading to hedge against inflation, thus achieving a healthy diversified portfolio. This is the case as there appears to be a historic correlation between stock market momentum and commodity prices. During volatile stock market activity, generally, silver and gold prices lure attention and gain traction.

Commodity markets are typically more volatile than stocks and shares, which invites traders who are looking to take on high risks in pursuit of obtaining a high reward. Consequently, for day traders and short-term investors, the commodity markets provide great opportunities to make short-term profits from volatile market action. This trading style is complemented by leveraged trading accounts, in which short-term traders can enhance their profits, from correct predictions in the price movement of the assets.

Downsides of Commodity Trading

Investing in commodities yields high risk, potentially higher risk than perhaps stocks or even bonds, therefore, day traders are cautious of the capital that they expose to such markets. For instance, oil prices fluctuate based on supply and demand levels internationally. During Covid-19, prices of WTI Crude Oil reached as low as $7 per barrel, due to minimal road users, thus driving down the demand for oil from exporters. On the other hand, in recent months, we’ve experienced spiking oil prices of $130 due to high US inflation, Russia going to war with Ukraine; and inclining interest rates. The sheer susceptibility of commodities to economic news makes these assets dangerous, especially if they are left widely exposed to a portfolio. As a result, commodity trading can erode, even a well-diversified portfolio, due to the true potential of how rapidly the market can move in a single direction, upon the release of news e.g. a war.

Final Verdict

The final verdict on commodity trading revolves around the style of trading that is being undertaken, so if a day trader is looking to profit from volatile price action, then the commodity market is sufficient for this type of short-term trading style. Contrarily, long-term traders may not see value in holding onto commodity assets, as they can be prone to immediate fluctuations from major economic events.

Depending on the investor’s risk appetite, perhaps investing in ETFs is a safer option since they carry less risk due to the nature of their low prices. Additionally, investors prefer to invest in ETFs because they account for a number of securities within the fund, which increases portfolio diversification. These funds track particular sectors, therefore, investors should ensure that they research which ETF fits well in their portfolio.