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Commodity trading consists of buying and selling physical commodities or commodity-related financial investments. The market is divided into soft and hard commodities. Hard commodities involve precious metals such as gold and silver and energy sources, including oil and gas. Soft commodities involve agricultural products such as coffee and wheat as well as livestock (cattle and chickens, for example).
Commodity investments range from the purchase of physical products, futures contracts (derivatives that structure a future price and date for sale), Exchange-Traded Funds (ETFs are investment funds made of multiple assets that trade on the stock market), Contracts for Difference (CFDs agreements with brokers that pay the difference between the opening and closing price of a position) and finally, commodity-related stocks (companies involved with any part of the supply chain of a specific commodity).
Supply and demand play a significant role in commodity prices. Prepared investors attempt to predict changes to the supply and demand of certain commodities, providing opportunities for investment. However, unpredictable events cause unforeseeable price movements, which can catch even the most well-researched investors off guard. From abnormal weather to political conflicts, transportation and manufacturing accidents, commodities have various forces affecting price. Risk management, therefore, is essential for a successful trader to manoeuvre through a volatile market.
The commodity market appeals to investors due to the diverse range of products available and constant evolution. Innovation is continuous as capitalist competition attempts to create more efficient and profitable business models. Certain commodities grow in demand as new profitable uses are discovered.
The Paris agreement, an international treaty signed by 196 countries to counteract the effects of climate change, was signed in 2016. Since then, global development efforts to become more efficient in energy production have intensified, creating a growing demand for certain commodities involved with renewable energies.
An investment opportunity created by new technology is found in Chile through SQM (Sociedad Quimica y Mineira S.A.). This Chilean chemical company is responsible for mining and supplying iodine, lithium and industrial chemicals. It is the world’s largest lithium producer, a metal required to manufacture batteries for electric-powered vehicles. As governments worldwide push towards green energy, demand for lithium and other metals associated with renewable energy production will likely grow. Valuation metrics show that SQM may be undervalued at the current price. The company, founded in 1968, also has a strong track record of steady growth. The trend for further technological investment makes this company an investment opportunity for those wishing to diversify into renewable energy sources.
Another investment opportunity is found in the food industry. ADM, or Archer-Daniels-Midland company, is a global food production and commodity trading corporation founded in Chicago. Demand for food will continue to grow as the population increases, creating a further need for food processing and distribution. ADM has a stellar track record of 49 years of continuous dividend increase (percentage of profits paid to shareholders). ADM offers a path into the food business for investors looking to diversify their portfolios into different investment areas (industries).
A different kind of investment opportunity is found in U.S. Steel Corporation, a manufacturing company responsible for extensive iron ore production and vast capability for raw steelmaking. These metals are vital for developing automotive, infrastructure and energy industries. A growing economy has significant demand for these metals. Worldwide construction and economic development are predicted to rise through the foreseeable future. Therefore, the future of these commodities may be successful. As a company with a long track record of stability, U.S. Steel offers new investors a path towards diversifying their portfolio with construction metals.
Barrick Gold Corp. offers a pathway for investors looking for trading opportunities in precious metals. Barrick is a precious metal producer based in Canada that operates worldwide. Precious metals, especially gold and silver, are amongst the most demanded and traded metals. Their varied qualities, which range from long-term stores of value to use in house electronics, correlate to substantial demand even during price downswings. With a considerable track record in dividend payments and long-term success, Barrick offers a simplified form of investment in the precious metals market.
The final form of commodity stock which can be considered for investment is energy company stocks. Cheniere Energy provides an avenue into the energy market. Disruption to Europe’s natural gas supply due to the Russian invasion of Ukraine created an opportunity in the market. This was taken by Cheniere Energy, which specialises in liquefied natural gas. The company delivered over 70% of its product to Europe. As the conflict is far from being resolved, Cheniere will likely provide Europe with considerable amounts of gas and will probably continue to grow.
Commodity investment offers portfolio diversification and a hedge against inflation. Commodities maintain intrinsic value and tend to perform well when consumer goods prices rise, while the equity market tends to suffer with high-interest rates. Rising inflation has become a global phenomenon in 2022, which has turned investors' attention towards commodities. The European energy crisis demonstrated this as natural gas prices skyrocketed since the Russian invasion created supply complications. Lack of supply means increased natural gas prices due to significant demand and an area for potential investment through a period of economic inflation.
Investment into commodity-related stocks provides certain benefits only available through the equity market. Most notably, dividend payments create a revenue stream for investors if they select successful companies to invest in. Thus, investors can exploit the best of both commodity and equity markets through these investments.
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