What is gold commodity trading

Your guide to commodities trading

What is commodities trading and why is it important to traders?

Commodity is the oldest form of financial instrument. The raw material market is almost as old as human civilization itself. As historical data suggests, rice was the first raw material around 6,000 years ago. In the times of Sumerian culture (4,500 BC) clay coins were used as money to buy cattle.

Today, commodities trading forms the basis of the global trading ecosystem. With the introduction of online commodity trading, private investors gained access to global commodity markets with a relatively small amount of capital.

Commodities became a popular means of inflation hedging and portfolio diversification. For many traders and investors, trading in commodities is a preferred way of protecting money and reducing the overall risk to their portfolios.

What are the most important raw materials?

In general, raw materials can be divided into 4 main categories:

  1. Agricultural commodities, including food crops (cocoa, cotton, grain, coffee, etc.), livestock (pigs, cattle) and industrial crops (including wool and wood).

  2. Energy resources, including natural gas, crude oil and gasoline, coal and uranium, ethanol and electricity.

  3. Metal raw materials, including base metals (i.e. iron ore, zinc, aluminum, nickel, steel, etc.) and precious metals (gold, silver, palladium and platinum).

  4. Environmental goods, including green electricity certificates, carbon emissions and white certificates.

Some believe that cryptocurrencies (a unique and extremely popular asset class) can also be called commodities.

Although the Swiss Financial Market Supervisory Authority (FINMA) and the US Securities and Exchange Commission (SEC) tend to regulate cryptocurrencies as something like stocks, many view real commodities as a better analogue for crypto.

To confirm this thesis, Bitcoin is referred to as “digital gold” and many cryptocurrencies are being “mined”. At its core, cryptocurrencies, like raw materials, are free from external control and their values ​​are determined by market conditions. In addition, cryptocurrencies can be exchanged for other goods and speculated. With all of this in mind, we list them here:

5. Cryptocurrencies, including Bitcoin, Litecoin, Ethereum, Ripple, Monero and many others.

Why trade raw materials

There are several main reasons for trading commodities:

Commodities in an equity portfolio can reduce volatility due to the lack of direct correlation between commodities and other asset classes.

In times of global economic uncertainty and market turmoil, commodities can serve as a safe haven as they retain their physical value.

The intrinsic value of raw materials does not depend on currencies. They will hold their value even if a currency falls during a period of inflation.

  • Speculation on commodity prices

Commodities can be extremely volatile, with sharp price fluctuations. Trading commodity CFDs is a great way to take advantage of drastic price fluctuations.

Commodities trading requires careful consideration due to the occasional high market volatility and a wide range of instruments available: from derivatives such as futures and CFDs to stocks of commodity-producing companies.

In commodities, the chance of big gains goes hand in hand with the risk of big losses. Commodity prices can be difficult to predict. The course can suddenly change due to various factors such as weather, political unrest and labor strikes. Unlike stocks, there are almost no basic financial metrics such as price-earnings ratio, interest rates, etc.

How to trade CFDs on commodities

One of the easiest and most popular ways to trade commodities is through CFDs.

A contract for difference (CFD) is a type of contract between a trader and a broker to benefit from the price difference between opening and closing a trade.

Investing in commodity CFDs saves you the inconvenience of paying for commodity storage as is the case with physical delivery. Trading commodities using CFDs allows you to go long or short without having to deal with traditional commodities exchanges such as CME, ICE or NYMEX.

In addition, CFDs give the opportunity to trade commodities in both directions. Regardless of whether your assessment of the forecast of the raw material price is positive or negative, you can try to profit from rising or falling future price movements.

In addition, commodities trading with CFDs often does not include any commission. Brokers make a small profit on the spread and traders try to take advantage of the overall change in price.

Another benefit for you is that CFD is a leveraged product. E.g. the 10% margin offered by Capital.com (the number may vary depending on the commodity and the CFD broker) means that you only have to deposit 10% of the total value of the trade you want to open. The rest is covered by your CFD provider. In the event that you want to place an order for a particular commodity worth $ 1,000 and your broker is asking for 10% margin, you will only need $ 100 to open that trade.

Trading Commodities CFDs: Why Capital.com?

Advanced AI technology at its core: A news feed like on Facebook offers users personalized and unique content that corresponds to their preferences. If the trader makes the decisions that are based on a bias, the innovative SmartFeed offers a range of materials to get him back on track. The neural network analyzes the behavior in the app and suggests videos, articles and news that will help optimize your investment strategy. This will help you refine the approach to trading commodities.

Trading with margin:Thanks to margin trading, Capital.com gives you the opportunity to trade commodities CFDs and other most traded commodities, even with limited funds in your account.

Trading in Contracts for Difference: When trading commodity CFDs, you are not buying the underlying asset itself. You are only speculating on the rise or fall of the particular commodity. CFD trading is no different from traditional trading in terms of the strategies involved. A CFD trader can go short or long, place stop-loss and stop-limit orders, and use trading scenarios that suit his or her goals.

All-round trade analysis: The browser-based platform allows traders to use fine technical indicators to create their own market analysis and forecasts. Capital.com offers live market updates and various graphic formats, and is available for desktop, iOS and Android.

Focus on security:Capital.com pays special attention to security. Approved by the FCA and CySEC, it complies with all regulations and ensures that customer data security is paramount. The company enables the money to be withdrawn around the clock and keeps the merchants' funds in separate bank accounts.

Top-5 international commodity exchanges

The introduction of online trading had the greatest impact on commodity futures markets. The physical trading floor was replaced with electronic marketplaces. Today, access to commodity futures exchanges is available to millions of people in different parts of the world.

Stock exchange

Founded

description

Chicago Mercantile Exchange (CME)

1898

The American commodity derivatives exchange that offers the largest selection of futures and options contracts. It was originally set up as a dairy exchange - the Chicago Butter and Egg Board.

Chicago Board of Trade (CBOT)

1848

The world's oldest exchange for futures and options trading. It has been a subsidiary of the CME Group since 2007.

New York Mercantile Exchange (NYMEX)

1882

The world's largest exchange for physical commodities. In 2008, NYMEX was acquired by the CME Group. It also operates COMEX, the world's leading metal exchange.

Intercontinental Exchange (ICE)

2000

Starting out as an exchange for energy markets, ICE is an electronic exchange for international raw materials and OTC products.

London Metal Exchange (LME)

1877

The UK exchange offering futures and options primarily on base metals.

Price history of the raw materials

Historically, the price of each individual commodity is influenced by various factors.

However, there are some key factors that always play an important role in the price formation of raw materials.

  • Demand from growth markets.Rapidly growing economies, such as China and India, have an increasing need for raw materials and basic goods for bringing people together, building the necessary infrastructure and heating houses and factories. Emerging market demand has the largest impact on commodity prices.

  • Care.The abundance or scarcity of raw material supplies can lead to significant price movements. Environmental, labor and political issues in the most important growing countries can influence the supply of raw materials and lead to price movements.

  • The US dollar.By maintaining the status of the global reserve currency, the USD can also influence the direction of commodity prices. When the dollar is strong, commodity sellers get fewer dollars for their product and vice versa.

  • Substitution.When the price of a particular commodity rises, buyers try to find cheaper substitutes, if any. E.g. cheaper aluminum can often replace copper in various industrial applications.

  • Weather conditions.Many types of raw materials are highly dependent on weather conditions. E.g. severe drought or heavy rainfall can destroy crops supplies. Storms, hurricanes and extreme cold can cause an increased demand for heating and lead to rising prices for energy resources such as gas or oil.

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