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Why you should not ignore commodities in your trading

Commodities are vital for the global economy

Commodities are the pillars of global trade. Several industries, and probably the global economy at large, would grind to a halt if the supplies of commodities were to be obstructed. Most likely at one point in time, people only bought and sold (or just used) primary commodities that were provided by mother nature, and nothing more. Thus, even if the global economy is much more sophisticated today, the foundation remains in fact commodities. 

Commodities are the foundation of the global economy

Take microchips for example. They require copper for their wiring, and silicone, among other rare earth metals to manufacture them. A shortage in any of those inputs can lead to severe consequences since those microchips are important components in several technological devices such as smartphones, computers, washing machines, and cars. 

Investing in commodities

You can invest in commodities in many ways. You can, for example, invest in spot commodity markets, future commodity markets, or commodity CFDs – which can include both spot and future prices.

Commodities are usually more suitable for long term trading, as they take time to grow in price. You can use trading apps like easyMarkets to hold commodities in the form of CFD contracts, for example, among other options.

What are commodities

Commodities are physical goods and assets that are usually traded on global financial markets, such as the London Metal Exchange, among others. There are several types of commodities, but the main ones to be aware of are:

  1. Agricultural commodities such as wheat, coffee, soybeans, and others
  2. Metals (including ferrous and non-ferrous metals) such as iron, copper, aluminum, and others
  3. Precious metals such as gold and silver.
  4. Energy commodities such as oil and natural gas
  5. Livestock and meat, which are sometimes called soft commodities.
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Commodities were used as money before

In addition to their vital role in many industries and production processes, commodities can be holders of value. Take silver or gold, for example. Both are considered precious commodities and have been used as forms of money before fiat money became widespread. Thus, the risk that those commodities will lose all of their value is quite low. It is often better to hold commodities than hold cash if your time horizon is long.

Things you should know before you invest in commodities

Investing in commodities is somewhat different from investing in stocks, bonds, or currencies. As an investor you need to understand how those different assets behave. Commodities generally tend to not price in new information right away, which can be both an advantage and a disadvantage. It can help you catch opportunities early, but it also means the price will take time to move towards your target. 

In addition, investing in commodities might mean investing in the mining industries which are capital intensive (That is, if you want to invest in mining company stocks). This can mean the yields are lower and the timeframe for the investment to mature is quite long.

Summary

Commodities are an important asset class to add to your portfolio. However, you need to be aware that those assets have different characteristics. They are generally more useful for larger portfolios which have a long time horizon. Either way, you need to take good measures to manage risk with any asset class, and commodities are no exception in that sense.

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