Which Commodity is Best for Trading?

Which Commodity
Is Best for Trading?
COMMODITIES

The Top Ten


to Trade

Commodities are essentially the raw materials from which other goods are created; the basic building blocks of the global economy. Consequently, they often serve as an excellent investment vehicle. Commodities fall into two broad categories: hard commodities and soft commodities.

Hard commodities are those that are mined from the earth or extracted from natural resources. This category includes metals such as gold, silver and iron, and energies such as oil, natural gas and coal. Soft commodities are agricultural products such as livestock and crops. The commodity markets are popular among traders. This is because they are highly volatile, a feature that provides traders with greater opportunities for success. What separates commodities from other goods is the fact they are interchangeable and standardised, with their values set by the relevant commodity exchange.

However, when it comes to commodities trading, not all commodities are equal.

Some are better than others. With a wide range of commodities on the market, it’s important to know what makes a commodity good for trading.

  • Crude Oil

  • Gold

  • Silver

  • Platinum and Palladium

  • Base Metals: Copper, Iron, Steel, Aluminium

  • Coffee

  • Natural Gas

  • Soya Beans

  • Corn

  • Wheat

What Makes a Good
Trading Commodity?

When trading commodities, liquidity is the primary thing you should consider. This is because liquidity determines the ease with which you can sell or buy a commodity. A liquid market is generally associated with relatively lower risk as there will likely be someone willing to take the other side of a trading position. A good commodity will usually have a well-established market of buyers and sellers at any given time.

Highly liquidity also means that a commodity will have less risk of slippage. Slippage refers to the losses that occur when bid-offer spreads are wide and it’s a common occurrence among commodities that exhibit low degrees of liquidity. Liquidity differentiates the most-traded commodities from the rest of the flock. This leads us to an all-important question.

What are The Top Ten Best Commodities to Trade?

Following is a list of the most commonly traded Commodities around the globe. Learn about the benefits of trading Commodities today.

1. Crude Oil

As the raw material for many products including diesel, petrol, lubricants, and petrochemicals, crude oil is one of the world’s most in-demand commodities. Two forms of crude oil prices are used to benchmark global price – Brent crude and West Texas Intermediate (WTI) crude. Fluctuations in prices of crude oil are especially sensitive to decisions regarding output made by the ‘Organization of Petroleum Exporting Countries’ (OPEC).

Brent crude is a ‘sweet light’ crude oil extracted from the North Sea. The oil is described as sweet because of its low sulphur content and light due to its relatively low density. These two characteristics mean that the oil is fairly easy to refine into usable end products.

WTI crude, which is also referred to as US crude, is extracted in various US states and is another ‘sweet light’ oil with an even lower density and sulphur content than Brent crude. Although the price of WTI crude was, in the past, heavily dependent on US consumption, developments in the ease of exporting the oil have led to its prices becoming more correlated with those of Brent crude.

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2. Gold

Gold, which is one of the precious metals, has remained a highly sought after commodity throughout history due to the numerous characteristics that make it fit for many industrial and commercial uses. While the commodity has retained its use in traditional industries such as jewellery and medicine, it’s also grown into a key material in the electronics and aerospace industries.

Furthermore, gold is widely considered a ‘safe haven’ asset because of its ability to retain or increase its value in times of economic instability and political uncertainty. As such, many traders move money into gold when fiat currencies are losing their value to minimise their risk. Furthermore, prices are affected when central banks—which hold gold—decide to diversify their monetary reserves by buying more gold. The world’s largest gold producers are China, Australia, Russia, and the United States.

3. Silver

Similar to gold, silver is another highly sought after precious metal that has remained popular throughout history. Although many people tend to prefer gold as a more reliable store of value, silver is still considered a ‘safe haven’ asset since its price often increases during periods of instability.

What makes silver less popular is that, unlike gold prices, silver prices rely significantly on the commodity’s demand from industry. Although the commodity has many uses, almost 50% of its demand is attributed to industrial uses such as its use in the production of photographic films, LED and RFID chips, solar panels, and batteries.

This means that silver prices tend to take a hit when industrial output drops.

Additionally, silver is often extracted from the ores of other metals such as copper, gold, and lead, therefore, fluctuations in demand for these other metals also affects the value of silver. The principal sources of the ores from which silver is extracted are found in Mexico, Canada, the United States, Poland, Bolivia, Peru, and Australia.

4. Platinum and Palladium

Two more precious metals, platinum and palladium, have over the years, become some of the top commodities to trade. Palladium, a very rare metal, is increasingly being seen as a safe commodity due to its prices being mainly unaffected by inflation or political uncertainty. The commodity has also gained popularity as its price has continued to increase steadily over the years, a trend that is forecast to continue into the near future.

Palladium is mainly used in car exhaust systems’ catalytic converters, but it’s also widely used in other catalytic reactions in the industry as well as in the jewellery and dental industry. Apart from being found with copper and nickel deposits in South Africa and Canada, the metal is also found as a free metal in Ethiopia, Australia, North and South America, and Russia.

Platinum is another one of the rarest metals. Approximately 97% of global platinum comes from just five countries: South Africa, Zimbabwe, Russia, Canada, and the United States. Similar to palladium, platinum is mainly used in catalytic converters although it’s also used in jewellery, dentistry equipment, and electrical contacts.

Platinum is increasingly becoming popular among commodity traders due to its ability to perform relatively well in less than favourable economic conditions. Additionally, demand for the metal is increasing as more uses for the metal are being discovered in the industrial sphere.

5. Base Metals

Base metals are common metals that are generally found all around the world and easier to mine. Unlike precious metals, base metals are plentiful and so their prices are often way lower than those of precious metals. However, the rising global demand for these metals due to their increased applications in many industrial and commercial capacities continues to have a positive impact on their prices.

The most commonly traded base metals are:

Copper

Copper, which is primarily mined in Chile, China, Peru, and the United States, is corrosion resistant and an exceptionally good conductor of both electricity and heat. These qualities make it a popular industrial material, especially in the production of electronics and alloys such as bronze and brass.

Steel

An alloy of iron and carbon, steel is a fairly inexpensive yet extremely strong metal that’s suitable for industrial uses in manufacturing, construction, and infrastructure. The metal has become quite popular due to its wide range of uses. Nonetheless, it’s important to note that as an alloy, steel prices tend to depend on the value of its constituent products. Most of the world’s steel is produced in China followed by India, Japan, and the United States.

Iron

Iron is a very bountiful metal that is also fairly easy to mine. China, Australia, India, Brazil, and Australia are the largest global producers of iron ore. The commodity has various industrial and chemical uses and it’s also used in steel production. Historically, there has been sufficient supply to meet demand and iron prices have been relatively stable. Increased urbanisation in recent years has also contributed to continued demand for the metal.

Aluminium

Another important base metal, aluminium is an exceptionally light and corrosion-resistant metal. The major aluminium producers are China, Canada, India and Russia. Aluminium is often combined with other metals to form alloys that are both strong and lightweight. Accordingly, the metal has many commercial applications including construction and the manufacture of packaging, planes, and vehicles.

6. Coffee

More than two billion cups of coffee are consumed worldwide every day and so it may not come as a surprise that coffee is one of the oldest and most traded commodities in the world.

With an estimated trade value exceeding $15 billion, coffee is the world’s biggest beverage commodity and one of the biggest food and beverage commodities by trade volume. Brazil is by far the biggest global coffee producer followed by Vietnam, Columbian, and Indonesia.

7. Natural Gas

Natural gas is a large non-renewable source of energy and fuel. It remains one of the most highly traded commodities globally despite the growing adoption of renewable energy sources.

Natural gas is used for electricity generation, heating, and cooking as well as in the manufacture of plastic, pharmaceuticals, fabrics, and fertilizers. The world’s biggest producers of natural gas are the United States, Russia, Iran, and Qatar.

8. Soya beans

Soya beans, which are also known as soybeans, are one of the most popular soft commodities. While soya beans are relatively inexpensive to produce, they are rich in protein. In addition to being used in the production of biodiesel, they are also used

in the production of various food and agricultural products including soya bean oil, animal feed, and meat and dairy substitutes. The United States is the biggest producer of soya beans followed by Brazil, Argentina, and India.

9. Corn

An important food source that is primarily used in the production of ethanol, animal feed, starch, and corn syrup, corn is a valuable agricultural commodity that is popular among traders.

Corn is also considered one of the most versatile crops and its demand has been fuelled further by the advent of biofuels. The largest global producers of corn, which is also known as maize, are Argentina, China, the United States, and Brazil.

10. Wheat

As the key element in the production of various food products such as flour, bread, and cereal, wheat is not only an indispensable commodity but an essential food source as well.

Wheat has an estimated trade value upwards of $45 billion and it’s one of the most-traded food commodities in the world. China and India are the biggest wheat producers in the world.

Each commodity is unique and it’s important to understand the different factors that affect it specifically. However, high volatility is one factor that is generally common among all the commodities and there are several common influences behind it.

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What are the Main Drivers of Commodity Pricing

Supply and Demand

Commodity prices are impacted by changing supply and demand for that commodity. The general fundamental rule is that prices will increase if demand increases or if supply drops for the commodity. Inversely, prices will fall when there is increasing supply and decreasing demand.

Commodity News

The news will move commodity prices since it has a significant impact on market sentiment. For example, negative news will likely lead to a negative market sentiment which will, in turn, likely push prices down. News is an important price influencer since many commodities will experience exceptional price movement on even just a rumour of some important news.

Currency Movements

Commodities are generally priced in USD, and although it’s not guaranteed, they tend to have an inverse correlation with the USD – when one increases, the other decreases and vice versa.

Economic Growth

The economic growth of a country can affect the price of a commodity, especially if the country in question is a major producer of that commodity. This is because economic growth boosts industrial strength. For example, Venezuela's economic war’ has affected oil prices. Although a major oil producer, Venezuela’s economic instability means the government has been unable to maintain and invest in the oil industry. This has led to constrained oil production which, in turn, has affected oil supplies and increased price volatility.

Geopolitical Environment

Commodity prices are often influenced by the geopolitical environment of the country where a commodity comes from. This means that prices will be affected by political uncertainty. For instance, since iron and steel are largely produced in China, its price will be heavily influenced by any political tensions that affect China. For example, steel and iron prices have been affected by the US-China trade war.

Weather

The weather plays a pivotal role in determining commodity prices, especially those in the agricultural sector. Bad weather which affects a harvest can lead to increased demand for a commodity and likely drive prices up. Conversely, favourable weather may result in a good harvest that leads to supply which exceeds demand for a commodity. In such a scenario, the price of the commodity will likely fall.

Weather can also affect non-agricultural commodities such as oil. For example, a cold spell can lead to increased demand for oil and natural gas for heating and this will likely increase commodity prices.

Consumer Trends

Changing consumer preferences and purchasing behaviours can impact commodity prices. For instance, traders planning to trade energy commodities need to be aware of any potential economic downturn that may occur as people embrace technological advances in alternative energy sources. A shift to energy sources such as solar energy, biofuels, and wind power may reduce demand for crude oil and natural gas, and with it, the price of these commodities. On the other hand, the rise in the use of biofuels may increase demand for corn and push up its prices.

Although these are common price drivers, some commodities will have their own unique price influencers. Understanding the specific factors that drive the prices of each commodity will put you in a better position to make educated decisions once you start trading.

How are Commodities
Traded?

Commodities are mainly traded in one of two ways; through futures or contracts for difference (CFDs). The futures market has traditionally been the most direct way to trade commodities. A commodity futures contract is a legal agreement to buy or sell a particular commodity at a predetermined price at a specified date and time in the future.

On the other hand, CFDs on commodities are a more modern and popular approach to commodity trading. Unlike commodity futures trading that generally demands a larger capital outlay, commodity CFDs offer high levels of leverage. The high leverage allows traders to gain great exposure to the underlying commodity with just a small fraction of the required capital. In other words, you can start trading CFDs with significantly less capital compared to what you would need to trade futures.

The Basics of Commodity

In addition to being able to trade on margin, commodity CFDs also give traders an opportunity to profit in both rising and falling markets. In a falling market,
you can go short (sell), meaning you sell high and buy back low.

When you sell, your profit will be the difference between the price at which you sell and the price at which you buy when you close the position.

CFDs are complex products, nonetheless, once you have studied the market you can start trading in a few steps.

Step 1

Choose a reliable commodity CFDs broker and open an account.

Step 2

Choose a commodities market by deciding the type of commodity you want to trade.

Step 3

Decide to buy or sell based on your market analysis. If you think a commodity’s price will rise, you can buy (go long) and if you think it will fall you can sell (go short).

Step 4

Once you have decided on the direction of your trade you need to decide how many units of the commodity you want to buy or sell.

Step 5

Set some risk management parameters. CFDs carry high risk and it’s prudent to control your trading risk with risk management tools.

Step 6

Place your trade and monitor your position. Once you have placed your trade, you should monitor it constantly as the market can take a sudden downturn.

No matter the commodity you choose to trade, your trading should not be arbitrary. It should be based on a sound strategy.

What are the Fundamentals of a Commodity Trading Strategy

One of the primary elements of a good commodity trading strategy is the proper analysis of the commodity you want to trade. To do this you need to understand fundamental analysis and technical analysis. While you can use either of the analysis methods, it’s common for traders to use both.

Technical analysis helps when learning and deciding when to enter and exit the market. This type of analysis relies on using charts and indicators to identify historical patterns that will help you forecast future price movements.

Fundamental analysis will help you understand the macroeconomic principles and events that affect prices. You can start your fundamental analysis by reading reports on the commodity you want to trade and following daily commodity-related news from reputable sources. Once you formulate your strategy, it’s prudent to test out its soundness on a demo account.

Your strategy needs to be backed by robust risk management rules to minimise your potential losses. Since commodities tend to be much more volatile than other kinds of investments, it’s fairly easy for unfavourable price movements to wipe out your entire account if you fail to monitor any threats to your open positions.

Stop-loss orders are one tool you can use to help manage your risk when trading CFDs on commodities. As its name suggests, a stop-loss order will help you cut your losses by automatically closing your position once the market reaches a predetermined price. You must, however, keep in mind that a stop-loss order will not always be executed at your set price. Sometimes price gaps occur due to slippage and you will need to use guaranteed stops if you want your trade to close at an exact price.

Note: Not all commodities have equal risk. You must make sure that you understand the risk profile of each commodity you want to trade.

Trading the Top Commodities

Trading commodities is unlike trading other assets. Although the basics of trading remain the same, every commodity is different. For example, the factors that move wheat prices will not necessarily affect oil prices. It’s important to educate yourself on each commodity you want to trade and the various factors that affect its underlying price. Your ability to carry out a thorough analysis of your chosen market will go a long way in helping you increase your chances of succeeding.

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