Why have commodities been actively traded in the last few years?
- 08 Aug 2022
Commodity trading is a long established practice that contributed to the growth of civilization and the rise of kingdoms and empires. Trading is an important activity that ensures you get the goods that you do not or cannot produce. Throughout history, trading resulted in special relationships between people and regions. Towns sprouted from trading grounds, and trade routes established reliable connections between different places. Today, you hear of different kinds of trade, including stock trading, securities trade, and commodities trade. While they all refer to different elements, their core concepts remain the same. However, in the recent past, commodities have been actively traded in different markets. Therefore, it is crucial that you understand what it entails and how you, too, can join the trade.
What is commodities trading?
Knowing what commodities trading is the first step to investing in the market. After all, you need to invest in a market that you can define well and understand all its risks. First, it’s essential to define commodities so you can derive what commodities trading means. Commodities refer to the raw materials used in the creation of other products. In essence, commodities are the building blocks of any economy. Commodities have four broad categories: energy, agricultural produce, livestock and meat, and metals. Some of the most traded commodities in the world include gold, soybeans, and natural gas.
Commodity trading means you buy and sell the raw materials used to produce other goods. The trade occurs either in a spot market or a derivative market. However, spot markets continue to become rare because of the popularity of online platforms. Commodity trades occur in exchanges that oversee and facilitate trade activities. You can opt to trade futures, options, or forwards in the commodity exchanges. An example of a commodities market is the London Metal Exchange.
Reasons for rising commodities trade in the last few years
The rising commodities trade in the recent past should pique your interest. Knowing the reasons for the increased trade helps you decide whether you want to join. Here are some of the reasons for the increased commodity market preference.
The commodities market responds to inflation differently compared to other markets. While inflation causes the value of commodities in other markets, such as the stock market, to drop, it results in an increased value of items in the commodities market.
Investing in a commodities market protects you from inflation by preserving the value of your investment. Inflation makes commodities more valuable to people because the increasing prices make them less affordable to the majority. Investing in commodities protects you from the uncertainties of the economy. Therefore, it is a valuable investment choice during economic uncertainties, which can protect your financial future.
Diversifying investment portfolio
Your investment portfolio shows the assets that you have. As an investor, you aim to grow your investment portfolio and cushion it from uncertainties and adverse economic occurrences. One of the ways that you can protect your portfolio is by diversifying your investments. This means investing in different sectors of the economy. Doing so spreads the risks to different sectors, which ensures some of your assets retain their value in case one sector of the economy experiences problems.
Also, diversifying your portfolio maximises your returns on investments. Commodities have a strong global demand that positively impacts companies that specialise in them. Therefore, shareholders in such companies get high returns, which helps them maximise their investment portfolios’ profitability.
Many opportunities to trade
The commodities market experience frequent price volatility. As a result, the prices of commodities can go up or down fast. The advantage of such price movement is that it creates opportunities for you to trade. You can buy a commodity when the price is low and sell when the price is favourable. You can trade and make a profit both when the market is moving upwards or when prices are moving downwards.
Protection from the devaluation of the base currency
Many factors devalue a country’s base currency, and one of them is inflation. However, investing in commodities protects you from the adverse impacts of the devaluation of the base currency. This is why seasoned investors buy gold and other precious metals when the base currency of their currency starts losing value. The recent rise in commodity trading is due to the fluctuation of the base currency of many nations. However, a rise in the value of the base currency results in a decrease in the commodity’s value. You should be careful not to experience a loss.
Hedging against unplanned events
Events such as natural disasters, wars, and economic ruin undermine the stability of a currency. Investing in commodities during such times allows you to leverage on price swings. For instance, you can buy a futures contract to shield your portfolio from current unfavourable events and prices.
The commodities market presents a unique opportunity to diversify your portfolio and escape the adverse impacts of inflation. The market also hedges you from unplanned events that have financial implications. These reasons contribute to the surge in activities in the commodities market in recent years. Considering the existing consumer trends, the commodities market will be experiencing an even bigger growth soon, and it’s up to you to decide whether you want to take part in that.