Many assets can be bought and sold in trading, and one of those asset groups is commodities.
Some of the resources we use in our lives are considered commodities.
As for the commodity examples, when we refill petrol in our cars, we use oil commodities. The same car we drive contains aluminum, in addition to other metal goods.
Generally speaking, a commodity is a necessary commodity that can be exchanged for other goods or money. They are often used in many products and are parts of finished products.
But apart from the daily use of those commodities, they can also be used in financial exchange, in short, trade.
Traders use commodities the same way they do other securities, either Forex pairs, stocks, or anything else.
Commodities that can be bought or sold for commercial purposes belong to one of two classes: hard or soft.
Both classes have specific characteristics, whether in volatility, supply/demand, or influencing factors.
Even though commodities and currencies are two different assets, most forex brokers still offer different commodity combinations in their trading package.
Another correlation between Forex and Commodities is that commodity prices are naturally expressed in currencies, and developments in either market can affect the other.
How to understand commodities
In our life, specific resources are essential to us: we use them for food, machinery, work, etc.
These natural resources are among the essential elements of the global economy. And they are called commodities.
What are commodities?
When we get a sandwich in the morning for breakfast, we eat commodities.
Here’s what this means: wheat – which is used to make bread – and cow’s milk – which is used to make butter – are both commodities.
Therefore, a commodity is an essential commodity, and it is the primary resource that humans can obtain from nature.
And while they are mostly used for everyday purposes like refilling gas into cars, manufacturing those cars, etc., commodities can also be used for stock exchange.
Basics of commodity trading
The strategy people use to trade commodities is mostly the same strategy they use for other securities.
For example, when a trader wants to trade oil, he usually buys that commodity when its price is low and waits for its increase.
When the price of oil reaches the required point and slowly begins to decline, they sell it.
The difference between a high selling price and a low purchase price will result in a payout.
What is the commodity
There are various ways to trade commodities online or offline.
The most straightforward way to do this is to enter into a futures contract and purchase a commodity at a specific price when delivered in the future.
However, there are indirect trading methods such as buying shares in companies that depend on commodities and their prices, buying mutual funds or indices that also invest in several of these companies simultaneously, and many more.
Different types of commodities
Commodities fall into two categories: hard or soft.
In contrast, hard and soft commodities contain individual elements, which are:
This commodity list includes resources that are usually received from the Earth in mining (minerals) or extraction (energy). In short, they are natural resources.
List of goods
The subcategory of metals includes precious materials such as gold, silver, platinum, and other minerals – iron, aluminum, copper, etc.
The global economy relies heavily on gold because of its stability, especially in times of the economy.
The Slowdown: When regular currencies become unstable, individuals and companies tend to invest in gold to preserve their holdings’ value over the long term.
Then there is the energy subcategory.
It combines natural gas and oil reserves. As mentioned earlier, these resources can be extracted from Earth.
Natural gas is the primary resource used for residential and commercial purposes – that is, to heat our homes and commercial buildings.
Oil – the most important commodity
In the commodities market and the energy subcategory, crude oil rightfully ranks first when it comes to its impact on the global economy and politics.
They provide nearly half of global energy needs. On the other hand, it is the most traded commodity in the market.
We drive our cars by refilling our tanks with gasoline; we take orders from abroad by ships that also fuel, and we fly on jet fuel planes.
Soft goods, unlike hard goods, need additional work to be created first and then received.
Here’s what this means:
When we want to make the wheat bake bread, we need to plant the wheat seed, cultivate the land, and then harvest the crop.
The same applies to “live goods” – be it cattle or other pets.
In short, this subcategory combines agricultural production and livestock
While agricultural production is the basis of every healthy economy, some countries go further and use these commodities as their primary economic source for export.
For example, the export of avocados to Colombia or cocoa beans to Ghana is the primary income source.
Factors that influence commodity prices
Supply and demand
When it comes to commodity trading prices, the primary factors affecting them are the forces of supply and demand.
Supply is the amount of a commodity offered to the market.
Demand is the amount of a commodity that people are willing to buy. According to underlying economics, if a commodity’s supply is higher than the demand, then the prices will fall. And if demand is higher than supply, then prices will rise. The same is true for the opposite cases.
Other important factors
Another significant influencing factor is the US dollar.
Since the US dollar is the main currency used in most global economic transactions, its stability or instability makes commodity prices stable or unstable.
For example, if the currency were strong, the price of oil would also be lower.
How to start trading commodities
There are also other factors like inflation and GDP (Gross Domestic Product).
Inflation means that the prices of goods and services are increasing, which also means that the costs of goods are rising.
In terms of deflation, the prices of other goods and goods/services are falling.
As for GDP, if it is high, the demand for goods will be higher because it is expanding.
And if it is low, there will be less demand for the goods because people have fewer resources to purchase them.
What is Forex Commodity Trading?
When talking about a commodity’s meaning and how this asset works, we mentioned that commodities and forex pairs are completely different assets.
While this is undoubtedly true, the two origins are still related to each other.
When Forex brokers offer currency pairs to their traders, many of them also include commodities in their trading package.
This means that traders can exchange currencies and oil, gold, crops, and other commodities.
Besides, commodity prices are expressed in currencies such as the US dollar. Therefore, developments in any of these markets can have a significant impact on the other.
Strange Ways to Trade Commodities
The most common commodities used in trade are oil, gas, gold, silver, etc.
However, there are other rather strange ways to trade commodities, which means that they are not as usual as the commodities mentioned above.
Futures for frozen orange juice
Under OJ’s symbol, frozen orange juice futures are one of the strangest commodities to trade on the market. OJ can be traded on the Intercontinental Exchange (ICE). The futures contract contains 15,000 pounds of frozen orange juice and can run up to 20,000 contracts per day.
Skim milk dry
This is also an odd commodity to trade. Under the symbol GNF, skim milk powder can be substituted on the Chicago Mercantile Exchange (CME.
There are other unconventional commodities like emissions allowance futures, uranium, dry whey, and more.