The financial markets are an incredibly complex system that allows individuals and businesses to effectively barter to determine the value of goods. This requires an in-depth knowledge of the value of various commodities including an understanding of their historical values and how they are likely to perform in the future.
Commodities traders are always looking for new ways to increase their profits, so they keep a close eye on the performance of a number of different products. This allows them to predict changes in the markets, identifying scenarios in which the value of a particular product is likely to increase or decrease and allow traders to make some money.
Traders will use a variety of different techniques to leverage their exposure to the markets to generate profits, including spread betting as preferred trading method, as profits are tax-free. The commodities market includes a wide range of different goods, from household groceries to precious metals, with the common denominator being that there is little to no difference between the products supplied by different producers.
There are several commodities that have traditionally attracted plenty of investment due to there being global demand for the items sold and the potential for making money through relatively small fluctuations in their value. Some of the most popular investment commodities include:
Oil
As one of the world’s most vital commodities, crude oil has always been a popular choice among investors. Not only it is one of the main sources of energy on which the entire economy depends, but it is also used in the production of a variety of other products with their own global industries such as:
- Plastics
- Steel
- Petrochemicals
- Fertilisers
- Textiles
- Lubricants
While green energy may have posed a minor threat to the price of oil, the fact that it is so widely used makes it a relatively safe bet in terms of investment. The price of oil can fluctuate significantly though, so speculators need to keep a close eye on the news as there are many geopolitical and economic factors that affect the price of a barrel from one day to the next.
Coffee
The global appetite for coffee has grown hugely over recent years and the advent of the many chain coffee shops that are now on every high street has fuelled demand. However, the coffee market is one of the most volatile of all the agricultural commodities, largely because of the locations in which it is grown.
Some of the major coffee markets are Brazil, Colombia, Vietnam, Ethiopia, and Indonesia and the specific conditions under which coffee must be grown mean that new markets are unlikely to open up. Some of the countries that produce the most coffee, however, are politically and/or unstable which can have a significant impact on the coffee markets.
As with any crop, coffee production can also be drastically affected by weather conditions which can completely ruin a whole season’s yield. It is also important not to underestimate the fleeting nature of trends, meaning that the public’s love of coffee does wax and wane periodically, affecting the price significantly.
Anything from a public health announcement to comments by influencers can alter the public perception of coffee, so it is often considered a high-risk option compared to some other, more stable products.
Gold
As a precious metal that has been in demand for thousands of years, gold is always a popular choice among commodities traders. The fact that it is relatively rare means that it has always been highly valued and the chances of significant amounts of new gold coming to the market are relatively small.
Much of the world’s gold is used by the jewellery trade, but it is also used extensively in the manufacture of electronics because it is very good at conducting electricity and doesn’t corrode like some other metals. Gold is also used in the aerospace industry as it is well-researched and understood and therefore a reliable metal to use in conditions where components have to be as close to indestructible as possible.
Because the value of gold is largely derived from its scarcity, it is relatively unaffected by geopolitical and economic unrest. The fact that gold holds its value so well and is a relatively low-risk choice makes it a popular one among investors.
Silver
Investing in silver has many of the same benefits as investing in gold, as it is also used extensively in jewellery and the decorative arts. It is also rare, although it is more abundant than gold, so it holds its value relatively well regardless of political turmoil.
However, silver is more widely used in industry than gold which means that it is subject to more fluctuations when it comes to economic changes. For example, silver is used in solar panels which means that it has been in high demand in times when investment in green energy is highest, but its value can also drop off if economic downturns lead to a decrease in interest in renewable energy.
The nature of commodities trading requires constant vigilance when it comes to keeping track of everything from geological exploration to the political nuances of a range of different countries. Effective traders have a good understanding of the historical performance of a range of different commodities and a strong sense of how they are likely to perform in the future.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
