Alternative Investments: Exploring Commodity Trading


Commodity trading is one of the oldest types of trading, dating back to the dawn of civilization. Thousands of years ago, people would trade commodities by exchanging goods of equal value, such as wheat for cattle. Today, investors trading commodities do not usually deal with the underlying asset directly, but instead trade in futures contracts and other derivatives.

Hedging and Diversification

Trading in commodities is a popular way to diversify an investment portfolio. As commodities are tangible assets, price movements rarely correlate to those for more traditional investments such as stocks and shares. Commodities also provide opportunities to protect against economic instability and hedge against inflation.

Inflation has been running relatively low on a global scale for several decades to date, meaning commodities have been performing weakly when compared to other types of investment. However, the global economic situation in 2020 has prompted many to invest in commodities as there are indication that inflation could be on the rise.

Demand for Commodities

Demand for commodities may fluctuate, but there are many commodities for which there will always be a demand. People will always need food, and people will always want gold. Investors can use special indices to track the overall performance of commodities. These indices tend to track a basket of several different commodities, such as precious metals, corn and crude oil.

Ways to Invest

There are multiple ways to invest in commodities, some of which are simpler and less risky than other. Direct investment means purchasing the commodity outright with a view to selling at a profit. Futures contracts are traded based on speculation about the future state of the market. Commodities traders can also invest in stocks in companies producing tangible assets. These include soft commodities, which are those that are farmed, and hard commodities, which are those that are mined.

Exchange-traded funds (ETFs) and mutual funds provide investors with further ways to invest in commodities without purchasing the underlying assets. These types of funds offer exposure to price movements of the asset and may invest across a wide portfolio of commodities and asset classes, including futures contracts, commodity stocks and physical materials.

Top US Commodity Exports

Crude oil and petroleum are the largest export category for commodities in the US. The market generates approximately $71.32 billion annually. The oil markets can fluctuate wildly, with prices driven up or down by several environmental and societal factors. The price volatility of the market makes these types of commodity investments unsuitable for inexperienced investors, as in-depth market knowledge is required.

The US generates around one-third of the global soybean crop, with a market value of $22.3 billion annually. The market price of soybeans often correlates to the price of other common grains such as wheat and corn. Conversely, soybean investments tend to oppose the value of the US dollar, making them more valuable when the dollar is weak.

Approximately $17.7 billion of gold is exported from the US each year, entering a global market which trades around $146 billion daily. Gold is one of the least risky investment assets as it tends to retain its value even during times of economic crisis. The US has the largest reserves of gold in the world, exceeding eight thousand metric tonnes.

Trading in commodities requires investor experience. However, for those with enough knowledge, it can help protect an investment portfolio from all manner of unexpected market fluctuations.

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