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Investing in commodities can help hedge against inflation, geopolitical risks, and currency fluctuations. Commodities, or raw materials, can also serve as a great method of diversification to use in your portfolio.
For first-time commodities investors, it’s important to keep the volatile nature of the asset class in mind. While this can be a risk, it also often poses speculative opportunities for the savvy investor. You may gain exposure to commodities prices through various instruments, such as Exchange-Traded Funds (ETFs), futures, options and CFDs (Contract for Differences).
Here are ten commodities you might consider, all tradable with FP Markets via CFDs, a leading global brokerage offering more than 10,000 tradable products.
Gold is one of the most commonly traded and liquid precious metals on the market. Its history is tied with our own monetary system as well; back to when most currencies were tied to gold reserves, this was known as the ‘gold standard’. While it has a few industrial applications, gold’s primary use is still in jewellery, and its value is driven by trust in its ability to maintain value and rarity. Historically, gold has been used as a hedge against inflation and currency devaluation. With uncertain geopolitical situations and global economic conditions, gold could be considered a safe-haven long-term investment.
Largest Producers of gold: China, Australia, and Russia.
Crude oil price volatility has been a main feature of the pandemic, with market prices for benchmarks, such as WTI and Brent crude, dropping drastically as lockdowns quelled the demand for travel, followed by extremely high energy prices as the global economy reopened. Despite the world's shift towards renewable energy, oil remains a dominant force in the energy market. Market news, such as OPEC's decisions, geopolitics, and production costs, can offer speculative investment opportunities in the oil space.
Largest producers of crude oil: United States of America, Saudi Arabia, and Russia.
Natural gas is still one of the dominant forces in the energy market. It is a cleaner alternative to coal, with lower emissions, but is still considered a fossil fuel. Frequently it is considered a ‘transition’ energy source, being an impermanent but necessary step to cleaner energy consumption as we move to more renewable alternatives. Prices for natural gas can be particularly volatile, especially recently with conflicts and geopolitical tensions between Russia and Europe.
Largest producers of natural gas: United States of America, Russia, and Iran.
Soybeans are primarily a high-protein food product, which has faced increased demand in recent years as it is a frequent component of plant-based animal product substitutes that consumers have begun to increasingly favour. It is also frequently used as feed for livestock, making the commodity highly related to horticulture both as an alternative and as feed. Like any other crop, soybeans are highly dependent on factors such as crop yields and climate.
Largest producers of soybeans: Brazil, United States of America, and Argentina.
Palladium is a type of platinum that has a unique niche in the commodities market. It is primarily used in catalytic converters that reduce harmful emissions in automobiles. With automobile production and emissions regulation becoming increasingly strict, palladium becomes more and more prominent as a metal. However, Palladium is rare and as a result, expensive, and is primarily produced in countries with geopolitical instability.
Largest producers of palladium: Russia, South Africa, and Canada.
Coffee is one of the most traded commodities in the world. It is a staple in many cultures across Asia, Europe, and the Americas. This ‘Coffee culture’ has created a strong and stable demand for the product, with further growth in emerging economies. Because coffee is often produced in tropical regions, it is especially affected by weather patterns. Climate change poses risks to coffee cultivation, potentially leading to supply shortages in the face of growing demand. Such dynamics could drive coffee prices higher.
Largest producers of Coffee: Brazil, Vietnam, Colombia.
Corn, one of the world's most cultivated crops, has long been a staple in the commodities market, playing a dual role as a food source and a crucial input for various industries. Its applications go beyond human consumption to feed for livestock, ethanol production, textiles, cosmetics, pharmaceuticals, bioplastics, and more. This diverse range of uses makes the corn market relatively resilient. Factors like fluctuating global production rates, climate and weather forecasts impacting crop yields, and changing dietary choices in emerging economies can lead to price volatility, presenting both challenges and opportunities for investors. Investors considering corn should keep weather patterns, agricultural technology advancements, farm subsidies, and international trade policies in mind.
Largest producers of corn: United States of America, China, and Brazil.
Often considered gold's cousin, silver has a dual role as both an investment and an industrial metal. Like gold, it has been used to hedge against inflation and currency devaluation, as well as in things like Jewellery. However, its use in growing sectors like electronics, solar panels, and batteries could make it a promising investment in the long term.
Largest producers of silver: Mexico, China, and Peru.
While Platinum is well known for its use and application in luxury products such as jewellery, it has many industrial uses and applications. Platinum is used in automobiles, electronics, medicine, and chemical production, and is a key component in hydrogen fuel cells.
Largest producers of platinum: South Africa, Russia, and Zimbabwe.
Cocoa is primarily a food product, most famous for being the main ingredient in chocolate. This means that it is heavily affected by consumer preferences and choices, this is important to keep in mind as consumer concerns regarding ethical production become more prominent, and Cocoa is often produced in unethical or unfair ways. Europe is one of the larger importers of cocoa beans because it is famously home to many chocolate processing and manufacturing companies, as well as Europeans being one of the highest chocolate consumers.
Largest producers of Cocoa: Cote D’Ivoire, Ghana, and Indonesia.
Commodities can be an exciting and potentially lucrative asset class to trade and invest in.
Each commodity has its own niche that you can use in your asset management strategy, including the ability to hedge against inflation, help maintain a diversified portfolio, or make speculative plays on changing macroeconomic fundamentals of the underlying assets.
However, it is important to know that the commodities market is famously volatile, and while that can provide opportunities, the market may also move against you. This is why, whether you’re a short-term trader or a longer-term investor, risk management should be the backbone of one’s trading plan or investment strategy.
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