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Raw commodities are bought, sold or traded in a commodity market. They are commonly separated into two categories, hard commodities and soft commodities. Hard commodities are natural resources that are mined or extracted, such as gold, natural gas, rubber and oil. Soft commodities are agricultural products such as wheat, corn, coffee, soybeans, sugar or livestock.
The commodity exchange can affect the global economy because it can influence the price companies pay for certain raw materials. So, it is essential for an investor that trades in a commodity market to lock in the quality, price and delivery date of commodity products to minimise their volatility and to help them plan their business endeavours. This can be accomplished by buying into a commodity futures contract. Futures contracts provide a direct way to invest in a commodity market. Investors though, also buy stock from corporations whose businesses rely on commodities prices, or they buy mutual funds, ETFs and index funds that focus on commodity-related companies.
Last year was marked by a high price increase in commodities (European Securities and Markets Authority, 2022). Governments are spending billions on aiding states as they are reopening after the pandemic. Companies are rushing to buy raw materials as consumer demand is rising, which as a result, is sending commodity prices higher and higher. Although an increase in commodity prices might be considered unfavourable (because the input cost increases which in turn hurts profits), the data reveals that when commodity prices rise, so do the profit margins. One of the reasons behind this is that a rise in commodity prices often reflects economic growth.
Commodity trading is a great start for beginners that want to participate in the financial market. With good research, an entry-level trader can create a profitable diverse investment portfolio. Below we provide 5 commodities to consider trading in 2022.
1. Crude Oil
Crude oil is an extremely popular fossil fuel and naturally occurring unrefined petroleum that comprises hydrocarbon deposits and organic material. In its unrefined state, it is not very useful. However, refined crude oil can produce highly demanded products such as gasoline. In 2021 the United States used about 135 billion gallons of gasoline (U.S. Energy Information Administration, 2022). Also, crude oil is limited and once used, it cannot be replaced, which plays a role in the price of crude oil and is argued to be one reason why its demand is ever increasing in India.
Over the last couple of years, oil price movements have been greatly influenced by the supply barriers and production cuts during COVID and, most recently, due to the Russian-Ukrainian war.
Brent Crude Oil, also known as Brent Blend, is a physically and financially traded oil, based near the North Sea of Northwest Europe. It is considered one of the leading global price benchmarks for Atlantic basin crude oil and is argued to set the price of two-thirds of the world’s international crude oil trade. The Organisation of the Petroleum Exporting Countries (OPEC), a group of fourteen major oil-producing nations, try to control its price by managing its supply.
Gold’s exquisite colour, multiple uses, its scarcity and difficulty of extraction, all contribute to its value. It is used for jewellery, investing in the finance market, building electronic devices, dentistry and medicine, aerospace and even medals and awards. It has been a safe haven during financial difficulties, when banks become less stable and when political instability rises. It has also been traded during wars for shelter, food supplies and safe passage. Investors have preferred gold as an asset for a very long time as there is trust that the price of gold will remain high.
In comparison to gold, silver is known for its higher volatility, but nonetheless, it is speculated that silver will be hoarded as much as gold. Various factors can determine this. Some current compelling reasons why silver has bullish expectations are:
- Silver is essential for the future of a clean energy economy, as it is used in solar power, electronic devices and electric vehicles. Innovation has impacted the price of silver because it is an essential component in superconductor applications and batteries.
- Multiple state mints have multiple production delays, which has limited the supply of silver and increased its rarity.
- The healthcare industry uses silver extensively for its antimicrobial properties.
Copper is one of the most widely used metals for multiple reasons. As a soft metal, it operates as a great conductor of heat and electricity, which is why it is used in electronics and communications, industrial machinery and equipment. It is also very versatile, which has made it extremely useful in construction and transportation. Like silver, it also has antimicrobial properties that help create products to reduce the spread of pathogens. Copper is also energy efficient as it improves the efficiency of energy distribution systems.
Copper has such a large footprint worldwide that it is used to speculate industrial growth. It is so large that a price change in copper can affect the supply and demand of the construction market. In the long term, some growth markets are aquaculture, electrical propulsion, renewable energy, seismic energy dissipation and electric vehicles. Initial data indicates that, in the first four months of 2022, the world copper mining production increased by about 2.9%. (International Copper Study Group, 2021).
One of the unique qualities of coffee is that it is a simple pleasure that can be enjoyed by almost anybody of different age groups and demographic. It is an affordable item with so many different styles and tastes. It is also associated with cultural as well as health benefits. Since ancient times, humanity has held coffee in high regard, both actually and symbolically.
Since the COVID pandemic, the price of coffee has skyrocketed. This is greatly due to the logistical hurdles created by the war between Russia and Ukraine (whereby economic sanctions have been imposed on Russia, which is one of the largest coffee consumers in the world) and due to the decrease in coffee production in Brazil (which is the largest coffee producer in the world and has suffered from a severe drought).
The popularity of coffee has made it one of the most profitable commodities in the market. Since the dynamics between supply and demand highly influence its price, factors such as bad weather and transportation hurdles can, on the one hand, limit its supply but, on the other hand, turn it into an attractive investment opportunity.
It is no secret that world resources are being pushed to their limits. Precious metals cannot be extracted fast enough and agricultural commodities are not being produced fast enough. In addition, the supply and demand of commodities have been affected by technological breakthroughs, severe weather conditions and wars (The World Bank, 2022). The Federal Reserve has warned that the volatility of the commodity markets might hit global financial institutions hard.
As far as business is concerned, it creates an opportunity because the scarcer items are, the more valuable they become. This is why, even during a period of inflation, great opportunities can be found in metals trading and other commodities trading.
European Securities and Markets Authority. (2022, June 3). Retrieved from www.esma.europa.eu: https://www.esma.europa.eu/sites/default/files/library/esma70-451-114_final_report_review_of_the_commodity_derivative_clearing_threshold_under_emir.pdf
International Copper Study Group. (2021). Retrieved from icsg.org: https://icsg.org/wp-content/uploads/2021/11/ICSG-Factbook-2021.pdf
The World Bank. (2022, April). Retrieved from www.worldbank.org: https://openknowledge.worldbank.org/bitstream/handle/10986/37223/CMO-April-2022.pdf
U.S. Energy Information Administration. (2022, June 9). Retrieved from www.eia.gov: https://www.eia.gov/energyexplained/gasoline/use-of-gasoline.php