It’s been a challenging few months for investors, with growth stocks losing momentum, a wider stock market decline, and cryptocurrency prices plummeting, hindering portfolio growth. But is there any viable asset left to trade? What if I told you that commodities trading has been around since ancient civilizations, with many investors still profiting from it in the modern age? Common examples of commodities trading include Gold, Silver, Crude oil, Brent oil and Natural gas.
The price of oil and gas has been the main headline in recent months, as some commodities have reached record heights over the course of this year. Consequently, this has many attracted investors to the commodities sector, according to Refinitiv, which reports a net inflow of $24 billion (£19 billion) into commodity funds in 2022. Moreover, with inflation at its highest level in 40 years, commodities trading also provides an opportunity for investors to profit from inflation above its rate.
Here’s everything you should know about commodities trading, including varying types of commodity investments and the future prospects for the commodities trading sector.
What are Commodities?
Commodities traded in the global market are basically natural resources and raw materials derived from soils, minerals, or other sources that are utilized worldwide.
Generally, commodities can be classified into two categories:
- Soft commodities — Anything that’s grown or reared: livestock and meat, as well as agricultural commodities like coffee, wheat, soybeans, cotton, and corn.
- Hard commodities — Anything that’s mined or extracted: fossil fuels such as crude oil, natural gas, coal, and petrol; and metals such as gold, silver, palladium, copper, lithium, and aluminum.
There are several factors that influence the price of commodities, most notably the supply and demand. The price of the commodity will rise if there is an increase in demand for the product, or if there is a decrease in supply.
For example, Trading Economics reports that lithium prices have risen over 400% in the last year as a result of the rising demand for electric cars worldwide. Similarly, oil and gas prices have soared as a result of reduced supply due to the Russian invasion of Ukraine and operational problems in Norway and Libya. In particular, the wholesale price of UK gas has increased by over 270% in the last year because of a resurgence in demand following the pandemic.
What is Commodities Trading?
Commodities are essentially bought and sold in large quantities through exchanges in the same way that stocks and shares are traded. There are four large commodity exchanges in the world, including, London Metal Exchange (LME), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Intercontinental Exchange (ICE) in Europe.
Commodities differ from other goods in that they are interchangeable and standardized, with a centralized commodity exchange setting their values. Trading of commodities previously took place in a physical setting, but today most commodity trades take place online. The impact of demand and supply on these goods’ prices causes them to fluctuate constantly. Commodity trading allows traders to leverage these constant price fluctuations to their advantage and profit from them.
The following sections will provide an overview of the most commonly traded commodities on the financial markets.
- Coffee — 2.25 billion cups of coffee are consumed worldwide each day, making it one of the world’s favourite beverages. Being the second most traded commodity market after petroleum, it is one of the world’s favourite commodity markets.
- Sugar — Raw sugar and white sugar are both traded as commodities. The majority of us think of sugar as a sweetener, but it also plays an important role in ethanol production. It is predicted that the market will reach USD 89.24 billion in 2024 at a compound annual growth rate of 2.9%.
- Crude Oil — Crude oil is a popular commodity to trade because of its volatility. A market like crude oil is highly reactive to political events because of its top producers, such as Saudi Arabia, the United States, Russia and China. Additionally, crude oil is in high demand because it is used as a transportation fuel, as a synthetic textile, a fertilizer, a computer component, and a cosmetic component. WTI and Brent Crude Oil are two of the major oil benchmarks.
- Natural Gas — Natural gas is used in industry, residential and commercial settings, as well as to generate electricity. Gazprom, Royal Dutch Shell, ExxonMobil, PetroChina, and BP are the world’s top natural gas producers.
- Gold — Often referred to as a safe haven asset, gold is where investors keep their money during market turmoil. The gold price is often inversely correlated with the US dollar.
- Silver — Silver is also a popular metal commodity for trading. The silver price moves much faster than the gold price, making it attractive for active commodity traders. In contrast, gold has a higher value and is often considered to be more attractive for long-term investors.
- Copper — Used in electrical equipment, engineering, plumbing, and cooking utensils, copper enjoys consistently high demand. Copper is considered a reliable barometer of global economic health, so investing in it is like taking a bullish position on GDP.
With an understanding of what a commodity is and the most traded commodities worldwide, we hope you now have a clearer understanding of what a commodity is. Now let’s learn how to trade it to generate profits in the digital world.
How do you trade in commodities?
The first step to commodities trading is to understand which commodities can be traded and which commodities should be traded to maximize your profits. As you might imagine, some commodities trade more actively than others.
The Feeder Cattle market, for example, may involve only the farmer and the distribution company, thereby not generating much activity. TradingView reports that Feeder Cattle traded 36,000 contracts in September 2019. It represents the number of feeder cattle contracts that have been purchased and sold. There are, however, numerous companies involved in a market like oil, including public and government-backed companies, service companies, such as BP and Shell, and airlines, who buy and sell oil as a means of reducing fuel costs, as well as speculators. TradingView reports a nearly 14 million contract trading volume for Crude Oil for September 2019 - a significant difference from Feeder Cattle.
As you can see, it is clear that commodities like oil and natural gas have proven to be enormously beneficial, even today when wars are raging over natural resources. Even though it’s possible to trade physical commodities in many forms, futures contracts are the most popular. Essentially, a futures contract allows producers and buyers to agree on a price and terms for the delivery of a commodity in the future.
In commodity trading, the traders bet on the value of the commodity in the future. If a trader anticipates the price of the commodity will go up, he’ll buy certain futures, referred to as ‘going long‘. In contrast, if a trader thinks the price of the commodity will go down, he will sell some futures, a practice called “going short“. Commodities can also be traded in physical form by buying and holding them. You can use this method if you are looking to purchase gold, or other precious metals, but it isn’t practical when purchasing other commodities.
Read top crude oil trading tips and strategies to learn how to take advantage of the world’s dominant energy source.
Commodities You Can Trade with AximTrade
AximTrade offers a wide array of trading pairs that enable commodity traders to increase their trading efficiency, as well as their profits. The commodity trading pairs offered by AximTrade are as follows.
|XAUUSD.ax||Gold vs US Dollar/ Spot|
|XAGUSD.ax||Silver vs US Dollar/ Spot|
|XAUEUR.e||Gold vs Euro / Spot|
|XTIUSD.ax||US Crude Oil|
|XBRUSD.ax||UK Brent Oil|
As many investment opportunities involving various commodities are available in AximTrade, being exposed to a wide variety of commodities trading pairs will be an added advantage for you. Consequently, you can take a look at alternative choices and compare the profits from several commodities and choose the best commodity pair that will bring you the most profit.
What are the benefits of trading commodities?
While there are many reasons to trade commodities, there are three main reasons why commodities are an appealing investment for today’s traders. These include the growing global population, inflation hedging, and portfolio diversification.
1. A hedge against inflation
It is widely known that inflation reduces the ‘real’ value of a currency over time. In other words, it means that $10 bought you less than 30 years ago, compared to today. Commodities, on the other hand, are subject to price increases in the future, which means it will take more dollars to be able to purchase the same number of commodities in the future compared to the current year.
Furthermore, inflation has reached a 40-year high of 9.1% in the UK, impacting certain types of assets’ returns. When companies cannot pass on higher costs to consumers, share prices may fall if profits are squeezed, and fixed-rate bond income is also reduced by high inflation.
By investing in commodities, however, returns have historically been positive when inflation is high, i.e., returns increase when inflation is high. As inflation measures include prices for commodities such as petrol and electricity in their ‘basket of representative items’, it doesn’t come as a surprise. Hence traders who invest in commodities can protect themselves from these price increases, and potentially gain more profit from their investments in the future.
2. Portfolio diversification
Financial markets are always going to experience fluctuating levels of volatility at various times of the year based on consumer perceptions and confidence. Since a number of other factors can also affect market performance, including economic, legislative, and corporate factors, it can be difficult to determine which asset is right for an investor. This is where investment portfolio diversification comes into play.
In addition to the different types of assets such as cash, stocks, bonds, and properties, commodities can be considered as another form of asset that can assist investors in diversifying their investment portfolios. Gold can be viewed as a classic inflation hedge since its price tends to rise during inflationary periods and in response to a rise in consumer prices. Unlike other assets, precious metals offer unique inflationary protection. They offer intrinsic value, do not carry credit risk and cannot be inflated.
However, despite the fact that the commodity market typically performs well in times of high inflation, unlike equity markets and fixed-rate bonds, it is crucial to understand the variety of factors that affect commodity prices, including weather, natural hazards, and geopolitical events.
3. Population growth
Over the last century, the global population has grown exponentially, reaching 7.7 billion today. Although there has been a slowdown in growth over the past couple of years, it continues to rise at around 1% annually.
It can be argued that the growth in population leads to an increase in demand for infrastructure, which is likely to have a significant impact on both the demand for metals and the demand for energy commodities. In addition, the fact that there are more people means there are more mouths to feed, which will affect the demand for agricultural commodities as well.
It is likely that commodities prices will continue to increase over time as there will be more demand for commodities due to the increasing number of consumers.
What factors influence prices in the commodity market?
When it comes to trading with the commodities markets, a number of different factors must be taken into consideration, such as:
1. Supply and Demand — It is generally believed that if there is a limited supply of a commodity, the price of that commodity will rise. Conversely, if there is a higher supply, the price of a commodity is likely to fall. Supply is affected by the following variables:
- Climate change: Such as in the case of agricultural products.
- Changes in production costs: Because of efficiency improvements, technological advancements or operational changes.
- A change in the competitive landscape: for instance, if new competitors enter the market or existing competitors leave.
There is a possibility that oversupply (supply exceeding demand) can push prices down, but if demand rises above supply, a shortage can occur, which can likely lead to more price hikes. Traders should stay up to date with supply and demand conditions due to the rapid fluctuations that can result.
2. Economic Performance — In times of economic uncertainty, consumers may be less likely to spend, and this can lead to a drop in commodity prices. On the other hand, a booming economy would lead to an increase in demand for certain commodities, causing prices to rise until supplies catch up.
3. Politics — There is no doubt that political events can affect the price of commodities. A country’s export and import policies, for example, can significantly impact commodity prices. It is also possible for crude oil prices to rise if a government increases import duties.
4. Traders’ Behavior — Due to the fact that all traders have access to the same charting, there could be a herd of traders buying or selling in response to a particular pattern that can affect price movement as well.
A major disruption has been caused to commodity markets due to Russia's invasion of Ukraine since both countries are major exporters of energy and agricultural products, which has severely affected commodity markets. The pandemic further exacerbated existing issues relating to the recovery in demand from the pandemic as well as constraints associated with supply as a result. According to the World Bank, commodity prices have been extremely volatile in the first quarter of 2022, with coal, nickel, and wheat reaching record levels of volatility.
How to get started with commodities trading?
Trading commodities is now very simple and straightforward if you choose to do so with AximTrade. Simply open a trading account with AximTrade and take advantage of both the commodity and forex markets with the best trading conditions and lowest capital you can invest.
The spread and margin requirements for commodities trading with AximTrade are among the lowest comparing other trading platforms. Traders are also given access to a wide range of tools and trading instruments in order to execute their trades with an informed perspective. As a result, you will be able to generate impressive earnings and reduce the risks associated with commodities trading.
Why Choose AximTrade?
AximTrade is a multi-asset broker and financial service provider with a set of advanced technologies and highly efficient trading platforms to enable traders to expand their abilities and opportunities. AximTrade’s standards of quality are uncompromising when it comes to transparency and integrity and is considered the best investment for beginners to start with. Know more about our exceptional trading conditions by checking the full AximTrade Review.
AximTrade stands out as the best broker in terms of its reliability and excellent trading conditions, offering Forex, Stocks, Crypto, Indices, Metals, and Energies, and facilitating in-depth market analysis using various tools accessible through the MT4 platform. Traders can choose from various types of trading accounts based on their capital and trading strategy. Choices include Standard Account, Cent Account, ECN Account and Infinite Leverage Account.
If you’re a novice in forex and finding it difficult to take advantage of market movements, try AximTrade’s leading CopyTrade platform and start trading like a pro from day one. Take advantage of the flexibility to choose from hundreds of successful trading portfolios and choose the best for you to follow.