Do you like commodity trading? Commodity trading presents both challenges and opportunities. There are 32 tradable commodities to be exact. In the beginning chances are you will be overwhelmed by the number of tradable commodities to choose from. Commodities markets are both broad and deep.
How are you going to decide that you want to trade gold or crude oil, soybeans or aluminum, silver or palladium, natural gas or frozen concentrated orange juice? What about cattle, corn, feeder or copper?
Do you remember the sudden spike in oil prices from around $60 to $145 during the summer of 2008? If the oil prices go up, the central banks are forced to raise the interest rates to fight inflation. Much of what happens in the world-from your home mortgage loan to your job depends on the global oil prices and the interest rates.
Oil demand will again go up once the global economy starts to expand again. This can happen again, be ready. The demand for oil has decreased just because the global economy has gone into a recession.
Should you trade commodities futures, or get stocks of companies dealing with commodities like Exxon Mobil or Starbucks or invest in ETFs or commodities mutual funds. How do you know what is the best way to invest in commodities? So how do you decide which commodity to trade? Just getting started in commodity trading can be daunting.
There are many ways of investing in commodity trading. As there are many commodity futures contracts that are traded on various exchanges, a lot of investors think that commodity trading is synonymous with futures trading. You should know that futures trading is not the only one way of getting involved in commodity trading.
Many analysts are of the opinion with the end of global recession the prices of most of the commodities will skyrocket. Oil, gold, copper and silver all hit an all time high between 2001 and 2006. Many other commodities reached an oil time high. The prices are down now somewhat due to the global recession. Do you know that the 21st century is the century of commodity trading?
A long term cyclical bull market in commodities is expected during the first part of the 21st century. This bullish opinion is based on some fundamental factors like the global population explosion, urbanization and the industrialization of the emerging market economies like Brazil, India and China (BRIC). As the recession will end and the global demand for commodities will rise again. The above three economies play an important role in the demand for commodities.
Commodities are poised for a rally that will last long in the 21st century. Gold prices are still going higher and higher. However, it doesn’t mean that there will be no minor downturns like that in the present due to the recession.
Do you want to ride the trend in the gold market? Countries like China, India, Russia etc are buying gold in the open markets that is driving the gold prices higher and higher. Wealthy investors are taking refuge in gold due to the financial crisis and weakness of US Dollar. You maybe already late!
Commodity trading can be fun and profitable if done well. A successful speculator has to keep an eye on what is happening in many markets around the world, it does not matter whether you are trading gold, soybeans or bonds. However, commodity trading is never easy. It’s not meant to be.
Commodity trading is certainly not for everyone. So what is the right vehicle for commodity trading? It depends on what commodity you want to invest in. Commodity trading not on the bull side or the bear side but on the right side, we must learn to trade commodity almost like mercenary.
Commodity futures:
The physical commodities still are the major components of the futures market although many new futures products have been introduced. The futures markets and commodities were synonymous because the futures markets were all about those physical products that you could touch, taste, grow, mine, consume or deliver until 1970s.
Commodity markets are so broad and diversified; they make you confused in the start. There are so many sectors in the commodity markets. Commodities can be broken down into several categories like metals, energy, grains, livestock, food and fiber. Metals include copper, gold, palladium, platinum, and silver just like other segments of the futures markets.
The energy futures market has become one of the most important gauges of the world economic and political developments. Crude oil futures began trading in 1983. Remember 2008, when the prices of crude oil jumped from around $60-70 to around $145. It was all due to the speculation by the hedge funds in crude oil futures. Natural gas futures contracts also get traded on NYMEX. Until 1978 when the New York Mercantile Exchange (NYMEX) launched trading in heating oil, Futures on Energy did not begin trading
Similarly you can trade precious metals like gold, silver, palladium and platinum futures contracts on different exchanges. Now gold is a very important precious metal. Gold futures contracts trade on NYMEX! Chicago Board of Trade (CBOT) offers mini gold futures contract with lower margin requirements for retail investors.
Chicago Mercantile Exchange (CME) offers live cattle futures contracts as well as milk futures contracts. Meat markets also have a number of futures contracts like the feeder cattle contract, lean hog futures contracts, pork bellies contracts like the other commodities markets. You can trade all of these contracts.
Agricultural markets are seasonal and offer many futures contracts that you can trade. These markets are highly dependent on the weather and other natural conditions. You will also find coffee sugar, orange juice and coca futures contracts traded on various exchanges. Similarly you can find many futures contract that cater to the agricultural markets like soybeans futures contracts, corn futures contracts.
There is another way to invest in the commodity markets. You can invest in companies that specialize in the production, transformation and distribution of these commodities. Equity markets offer access to commodity trading in an indirect manner although the futures markets offer the most direct way to invest in commodity trading.
Instead of directing trading energy futures contracts you can invest in energy stocks. For example by investing in the diversified mining companies like BHP BILLITON or electric utilities or the integrated energy companies like EXXON MOBIL will still allow you to profit from the commodities boom.
Commodities mutual funds and exchange traded funds that deal with the commodities sector are another way to invest in commodity trading. You can also invest in the Master Limited Partnerships (MLPs) that invest in energy infrastructure like the oil pipelines and natural gas storage facilities.
