Every investor is familiar with trading stocks, and while there are some similarities, commodities trading is different. It entails diversifying beyond common investments like stocks and bonds. Instead, it focuses on raw materials such as natural gas and oil, precious metals such as silver and gold, and agricultural products including sugar, wheat, and coffee.
As with stock trading, investors speculate on the prices of commodities, looking to benefit from price fluctuations. Some investors use them to hedge against inflation, but they have to understand that volatility affects the price of commodities. Volatility can make their prices move against their positions, leading to losses.
Investors Should Understand Themselves Before Trading Commodities
Before an investor starts looking at uncovering profitable opportunities, they have to understand themselves. They should assess and know their risk tolerance, knowledge of commodities trading, and the capital they have available for trading or investing.
Patience and emotional health are also important, especially in highly volatile conditions that might tempt an investor to pull out of their position for fear of losses. For this reason, it is best to start with the commodities you understand best and then diversify as you gain more knowledge.
Selecting the Best Commodities
It is best for investors to concentrate on one or just a few commodities to start. Doing so helps you understand the quirks within trading those commodities and gain deeper knowledge that many traders who make losses do not have.
The best commodities for you will depend on your investing strategy. You can choose commodities that are very liquid and whose price fluctuations due to changes in market sentiment can be a source of significant profits. However, these more liquid commodities are also highly volatile.
Oil is a particularly profitable commodity that is best traded on a Friday. The reason is that the CFTC Crude Oil speculative net positions and the U.S oil rig counts are announced on this day, and they both can move the market in wild ways, opening up opportunities for investors to make profitable trades.
If they cause the price of oil to go up, day traders and investors looking to profit immediately can sell. If they cause the opposite effect, investors can buy the commodity knowing that the price will go up sometime.
You can find instances of announcements like these causing fluctuations in commodity prices in numerous sectors, which you can then leverage.
A Combination of Rarity and High Demand
Commodities that are rare and in high demand also present opportunities for making a significant profit. The best example of such a commodity is gold. Gold is scarce as there is a limited supply of it on the market, which means demand typically outstrips supply, leading to an increase in value.
Gold also benefits from demand from different sectors. It is an investment vehicle for many investors, an asset reserve for investors and the government, and is in high demand in the jewelry and technology industries.
Oil also benefits from high demand due to its importance in the transportation and manufacturing sectors. Additionally, countries that produce oil and corporations that control its supply keep supply levels steady to ensure sufficient demand. In turn, this keeps its price steady.
However, a change in this delicate demand and supply balance can open up opportunities for profit. If the supply outstrips demand — as happened in 2021 when producers would not halt production, the price kept falling, demand remained the same, and OPEC+ could not come up with a solution fast enough — the price drops quickly and investors can buy at this lower price. They can then sell their position for a profit in the future when the price rises again.
Since investors know highly liquid commodities are the best for trading, there is an issue of crowding. Crowding happens when many investors are interested in the same types of investments.
Crowded commodities often have higher prices since demand is higher than supply, and there is a higher possibility of bubbles due to the increasing rise in their price and for them to behave erratically. These three factors mean that investors should know which investments are crowded so they can either avoid them or invest in them cautiously.
The good news is that there are many other profitable commodities besides the popular ones. Metals like iron ore, copper, and aluminum, or even livestock and meat, are less crowded but still present opportunities for significant profits for investors.
Understanding Factors That Affect Commodity Prices
Investors can also uncover opportunities for profits if they understand the factors affecting different commodities’ prices. These factors include consumption, production, currency movement, geopolitical environments, economic activity, weather, transportation, and seasonality.
They all affect the price of commodities by determining how much supply and demand there is for them in the market. Knowing what is happening in the world will help you be more aware of the movement of the price and value of commodities. You can then put yourself in a position to profit from them.
Commodities trading is an excellent way of diversifying your investment portfolio. For it to work for you, you should know how to uncover profitable opportunities. Selecting the right commodities, knowing of opportunities where there is less crowding, and keeping yourself informed will help you do this.
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