Commodities

Commodities Market

A commodity is a basic good or raw material in commerce that people buy and sell. Commodities are usually the building blocks for more complex goods and services. By trading volume, the top commodities include Gold, Silver, US Crude Oil, Brent Crude, Copper and Natural Gas.

For investors, commodities can be an important way to diversify their portfolio beyond traditional stocks. Because the prices of commodities tend to move in opposition to the stock markets, whilst some investors also rely on commodities during periods of major market uncertainty.

Spot, Metals and Energies

Commodities are divided into different categories with metals, such as spot gold, and energies, such as crude oil being the two major categories. Precious metals are attractive to traders as they offer insights into global economic health and are often viewed as a safe-haven in times of economic turmoil. The idea behind investing in precious metals is that it protects investors’ portfolio against inflation. For CFD traders, these dynamics between market uncertainty and safe-haven investing in precious metals, can help them speculate on the future price direction of different metals.

How to trade commodities?

Commodity CFDs are traded in a similar manner to all other CFDs but their values are influenced by different factors. When trading commodities, it is important to be aware of events that can have an impact on their prices.

Oil prices for example tend to be affected by global economic developments and oil output levels. Overall, oil can be regarded as a benchmark of the health of the global economy: speculators believe that when the economy is doing well, more oil will be consumed, and the price will consequently rise. Gold on the other hand is considered a measure of confidence (or the lack of it) in the global economy.

Trading Example

Commodities are traded in dollars, against other currencies, or as individual CFD assets. If you wish to trade gold for example, you first need to choose whether you will be buying or selling gold against the euro or dollar. Once you determine the direction of the trade you wish to place (Buy or Sell), you then need to think about your exposure. For example, when gold is trading at $800 per ounce, the contract has a value of $80,000 ($800 x 100 ounces). A trader that is long at $800 and sells at $810 will make $1,000 ($810 – $800 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $800 and sells at $790 will lose $1,000.

Benefits

Commodity prices tend to be quite volatile, which could be considered an advantage for CFD traders as it means that there are always plenty of trading opportunities. With CFDs, you are also able to increase the size of your trades with leverage. Just like forex, commodity markets are open for a large part of the week, which means that as a trader, you have the flexibility to trade around your own schedule. Trading commodities can also help you maintain a more diversified portfolio, as commodity prices tend to have low or opposite price correlations to other asset classes.

Risks

As with all trading, speculating on commodity CFDs involves risks including the risk of trading with leverage which can magnify your gains as well as your losses. Other risks include price fluctuations in commodity prices. Commodity prices can be extremely volatile, especially in times of geopolitical instability – and while this volatility can create trading opportunities – it can also be a major risk factor should your trades move against you.