Commodities trading: Overview
Commodities are an important aspect of most American’s daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Traditional examples of commodities include grains, gold, beef, oil, and natural gas.
For investors, commodities can be an important way to diversify their portfolio beyond traditional securities. Taken into account the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility.
In the past, commodities trading required significant amounts of time, money, and expertise, and was primarily limited to professional traders. Today, there are more options for participating in the commodity markets.
In the broadest sense, the basic principles of supply and demand are what drive the commodities markets. Changes in supply impact the demand; low supply equals higher prices. So, any major disruptions in the supply of a commodity, such as a widespread health issue that impacts cattle, can lead to a spike in the generally stable and predictable demand for livestock.
Global economic development and technological advances can also impact prices. For example, the emergence of China and India as significant manufacturing players (therefore demanding a higher volume of industrial metals) has contributed to the declining availability of metals, such as steel, for the rest of the world.
Benefits of Commodities Trading with FXCore
Trade with Leverage: commodities are traded on margin, so you can choose the leverage suiting you up to a maximum of 30:1
- Competitive Spreads: we have tight spreads on our full range of commodities
- Fast Trade Execution: we provide low latency and efficient price feeds to ensure fast trade execution
- Lower Trading Cost: commodities attract a much lower cost compared to other instruments, keeping your commodity trading costs down
Tradable on Multiple Devices: using our mobile trading platforms, you can trade commodities across your favourite mobile devices
Key Drivers of Commodity Prices
Supply and Demand
The price movements depend on the supply and demand for each commodity. As the supply and demand fluctuate, the price will do the same or the opposite. Hypothetically, commodity price increases with demand. So, we can also conclude, that as demand increases for a commodity, the price will also increase. And if the demand for a certain commodity falls, the price will fall accordingly. Now, you can better understand the way it works to prepare yourself for the trading process.
Since commodities are usually priced in USD, as the value of the USD falls, commodities will become more expensive for traders using this currency to pay for them. Let’s say, the USD experiences a sharp rise against a basket of major currencies – commodities such as crude oil, energies, precious metals, and a variety of agricultural products will usually see a fall in price in response. However, markets do not always operate in a completely uniform manner, and further external factors should also be considered when trading.
Most commodities are susceptible to political uncertainty and political changes. Unfortunately, a majority of the world’s most commonly traded commodities are produced in unstable regions, such as the Middle East and Africa, which have recently been experiencing a number of regional crises. For example, the Middle East is the largest producer of crude oil, but the western countries impose sanctions on various countries within the Middle East, so Brent and WTI crude oil prices can become heavily influenced.
The economic prosperity of a country affects the price of a commodity, as it determines the purchasing power of a given population, with the effect becoming more obvious if the very country is a major producer or user of that commodity. Venezuela is a major producer of oil, the government has caused significant damage to the country’s oil industry through lack of investment, corruption, and cash shortages. It has crippled the economy and resulted in hyperinflation. The economic sanctions imposed on Venezuela have further constricted oil production, exports, and revenues in the currency.