Commodities are categorized as alternative investments since they do not fit into the traditional asset classes of stocks, bonds, or cash. Despite typically occupying smaller segments of retail investor portfolios, these globally traded raw materials fulfill crucial functions, such as hedging against inflation or providing a safe haven during market uncertainties.
Although commodities can yield substantial short-term profits, they are also susceptible to significant short-term declines. While speculators aim to capitalize on these fluctuations, long-term investors recognize that the primary appeal of commodities lies in their potential to diversify investment portfolios. Some examples of commodities include crude oil, gold, wheat, natural gas, soybean, and copper.
Read more about the Different Types of Commodities here.
Understanding Commodities
While each commodity has its own unique price influencers, they commonly exhibit volatility due to their connection with economic cycles. During periods of economic growth or anticipated improvements, industrial commodities like copper and crude oil tend to perform well, driven by increased demand or speculative trading.
Agricultural commodities such as soybeans, wheat, or livestock are also influenced by supply and demand dynamics. However, agricultural commodities face even greater supply uncertainties compared to metals due to shorter planting cycles and the unpredictability of natural factors like droughts or floods.
Factors that Move Commodity Prices
Economic Cycles
Commodities tend to be volatile investments primarily because most of them are strongly influenced by economic cycles. Copper is a prime example of dependence on economic cyclicality. Often dubbed "Dr. Copper", Copper can be used to effectively gauge overall economic health through its price fluctuations due to its extensive use in construction, electrical equipment, and transportation.
A study conducted by the CME Group in 2022 investigated the relationship between copper prices and various indicators of global economic activity. The findings revealed a robust correlation between copper prices and the global economy, with a particular emphasis on China, as well as with oil and gold/silver prices.
Geopolitical Risks
The risk associated with investments varies depending on the asset. For instance, oil prices are significantly impacted by geopolitical factors, leading to sharp fluctuations when tensions arise in oil-producing regions, which are frequently numerous.
Supply & Demand
The prices of commodities such as oil, gold, silver, and copper are primarily determined by the balance between supply and demand. This can increase their riskiness, particularly when supply surpasses demand. Conversely, if there's a scarcity of a commodity, its price can see significant appreciation.
However, gold operates under a different dynamic regarding supply and demand compared to industrial metals and energy commodities. While mine output heavily influences supply, demand for gold is often propelled by the financial interests of central banks and investors, rather than by raw industrial demand.
Read more on the latest updates regarding gold in the first quarter by clicking here.
Industrial Utilization
Other precious metals like silver, platinum, and palladium are also sought after by investors and are more widely used in various industries compared to gold. This distinct feature gives gold a unique position in both the global financial system and investment portfolios.
China's economic activity plays a significant role in commodities investing due to its substantial population and its status as a major global manufacturing hub. The country's demand for industrial metals, coal, soybeans, and other commodities is immense, making it a crucial market. Additionally, China is a significant consumer of gold.
More than half of the global demand for commodities originates from China, underscoring the importance of China's economic outlook in determining commodity trends. Current projections indicate a 4.6% economic growth rate in China, suggesting a healthy economic environment rather than a recession.
Different ways to trade commodities
One of the primary methods of investing in precious metals involves acquiring physical bars and coins. However, this entails the need for storage and insurance, which can diminish potential gains from price appreciation—the sole means of profit with bullion. Nonetheless, for the majority of investors, storing gold in a secure deposit box at a bank is likely more convenient than storing grain in a silo.
Maintaining a diversified commodity position physically presents challenges such as agriculture spoilage and upkeep of energy storage facilities. This is where engaging with financial markets for commodities exposure becomes crucial. Depending on their expertise level, investors typically achieve this through futures, stocks, and funds.
Futures
A wide range of commodities are traded in futures markets worldwide, encompassing industrial and precious metals, soft commodities such as cocoa, wheat, and soybeans, as well as energy commodities like crude oil.
One of the key benefits of futures trading is leverage. Leverage allows you to pay a margin and get the same benefit of buying the entire quantity of stock. However, this involves complexities such as margin usage and the need to comprehend contract rollovers instead of opting for delivery.
Stocks
For many investors, purchasing stocks of companies involved in commodities may seem more conventional.
However, investing in shares of an oil company or a copper miner carries its own set of risks, and the performance of these stocks may not always mirror that of the underlying commodities. Owning commodities through commodity-related equities exposes investors to operational risks associated with the company, including industrial accidents, labor strikes, and management errors.
Most Popular Commodities to Trade
Some of the most popular commodities are oil, natural gas, gold, silver and copper. Among these commodities, oil commands the largest market share, while gold is favored as the most popular choice for long-term investment due to its role as a hedge against risk.
A diversified portfolio of these commodities would encompass the energy sector, including aspects like transportation and home heating; industrial metals, which are influenced by manufacturing cycles; and precious metals, which are influenced by dynamics in financial markets.
How to trade commodities
Using a brokerage account
If you're currently involved in the stock market, chances are you already possess a brokerage account, which is typically sufficient for investing in the stocks of gold miners, oil companies, or ETFs that include them under a single ticker symbol.
Alternatively, if you wish to engage in futures trading, numerous online brokerages and trading platforms offer the opportunity to trade futures.
Trade futures on a commodities exchange
Numerous futures exchanges exist globally. For instance, the Dalian Commodity Exchange (DCE) offers products such as soybean and iron. Additionally, ICE Futures US (NYBOT) provides commodities trading opportunities in coffee, cocoa, sugar and cotton.
Each exchange hosts an extensive array of commodities trading products on its website. For those seeking more unconventional options, trading opportunities include rough rice on the Chicago Board of Trade (CBOT), purified terephthalic acid on the Zhengzhou Commodity Exchange (ZCE), and palm oil on the Asia Pacific Exchange (APEX).
Start Trading with Orient Futures Singapore
Being an Overseas Intermediary of Shanghai International Energy Exchange (INE), Dalian Commodity Exchange (DCE), and Zhengzhou Commodity Exchange (ZCE), when foreign clients participate in internationalised futures contracts in these Chinese markets with us, they have direct access to trading, clearing, and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
Orient Futures Singapore also currently holds memberships at the Singapore Exchange (SGX), Asia Pacific Exchange (APEX), and ICE Futures Singapore (ICE SG). Starting August 2023, corporate clients can also gain access to the B3 Exchange through us, opening additional trading avenues.
Expect streamlined processes and an easy-to-use interface designed for minimal latency, accompanied by our team's round-the-clock availability on trading days to provide assistance for all your trading needs.
