Commodity trading and the hidden prospects behind it

November 16, 2020 | 10:50
Carefully picked commodities can make for a steady long-term investment, growing on the back of multi-year trends. However, zooming in on the charts shows plenty of opportunity for short-term gains, provided the trader has solid fundamentals and understands how events can ripple through the market.
commodity trading and the hidden prospects behind it
Savvy investors can make the most out of commodities trading, Photo: Shutterstock

As the objects of trading are physical goods, market movements essentially boil down to supply and demand. And as both the sellers and ultimate buyers look for stability, there are some very stable trends for many commodities, such as energy and metals.

While short-term shocks are still possible if the scarcity or abundance of a commodity is (or may be) affected by events like political turmoil or bad weather, the market is more about the fundamentals: the spotting of long-term trends that will drive up or down general market prices, and their interplay with short- and medium-term impacts, like the age-old love-hate relation of the USD and gold.

There is tremendous satisfaction in spotting incoming waves and being swept to the top (or the bottom, depending on the trader’s strategy) – but there are other considerations making commodities a must-have in every trader’s portfolio.

The first such consideration is one of the most overarching trends setting up commodities, especially soft ones, for a steady path in the long term: population growth.

By the estimates of Worldometer, while growth will decelerate somewhat, the population will still monotonously increase in the following three decades to reach 9.8 billion by 2050. The maths are simple: more mouths to feed and the same arable area (if not less due to climate change) will raise the price of agricultural commodities like wheat or rice.

The same applies to energy: population growth and growing industrialisation across the globe are setting up energy commodities for growth. However, how this growing demand will be allocated among the different energy commodities – think fossil fuels and renewables, but also the varying options under both labels – and which particular commodity will be the largest winner, is anyone’s guess.

Generally though, renewables seem like a safer bet while oil and gas will be subject to the contrasting influences of scarcity and fewer use cases as transportation is shifting towards electric vehicles.

Another consideration would be inflation hedging. Growth comes with inflation, which means the same amount of commodities or goods will be worth more currency at a later date. Thus, investors purchasing commodities directly and then selling them later can turn a pretty penny. As a general rule of thumb, holding certain commodities for the long term (those that do not come with an expiry date, that is) could be a smart use of a portion of one’s savings.

Last but not least, commodities are a valuable asset for portfolio diversification. The foreign exchange market, company stocks, and cryptocurrencies are all appealing to investors, but it is advisable not to keep all eggs in the same basket. Spreading investments across several asset types, and even several commodity types, could help ensure that one falling market does not bring the house down around the investor – while numbers in one market are in the red, good performance in others could balance out the losses.

Multi-asset brokers like Exness give investors the opportunity to trade commodities online at the market’s best prices and with low trading costs. It is one of Exness’ core beliefs that portfolio diversification is absolutely essential for every investor and their diverse offering stands as a testimony to it. In addition to offering trading in commodities such as gold, silver and oil, the broker offers trading in stocks, indices, cryptocurrencies, and currency pairs.

Investors with a solid grasp on what makes the world turn, with a clean understanding of the fundamentals of supply and demand, will find a lucrative application for their skills in commodities trading. A clear sight of generational trends makes commodities a valid investment channel to keep money for the rainy days.

However, for those looking for payouts on a shorter term, these assets hold plenty of excitement as there are a multitude of waves to ride, some of them quite wild – think back to oil companies practically paying producers to take oil off their hands due to the coronavirus pandemic just this year.

Aspiring traders need to know their commodities, their main supply and demand sources, and keep an eye out for anything that could alter the balance. At the onset of the outbreak and even when social distancing measures descended, few non-industry professionals connected the dots for what it all meant for oil – but those who did found a wealth of opportunities.

Equally important is to make sure that these opportunities are tapped into through a regulated financial firm like Exness. The amount of online scammers pretending to offer investment services sadly seems to be on the rise. To make sure one does not fall into such a trap, careful research should be conducted before trusting a company enough to invest funds through.

By Tom Nguyen

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