Commodities are an asset class that is growing in importance in recent years. Some of the major commodities like gold, oil, coffee, cocoa, or rice are traded in large quantities, and their prices are subject to significant volatility. In times of pandemic, it is wise to think again about starting to trade commodities. If you are looking for an answer to a question, ‘’should you invest in commodities’’, generally, you shouldn’t invest in something you don’t completely understand, not even in the commodity market. So, here we will briefly explain what a commodity market is and how to invest in it.
How Does Commodity Market Work
The prices of goods and products in commodities are shaped by the most fundamental law of the economic sector: supply and demand. It’s a market that depends on a lot of factors. Good or bad harvests will influence the price of agricultural commodity products. The discovery of more or less important deposits will affect the price of crude oil and on the metals.
For example, take a look at a price fluctuation since 2016. Commodity prices have experienced a general increase from 2016 to 2018. Oil has increased by 70%. Natural gas increased by 21%. Metals like steel rose 110% just in 2018 before falling back. Gold, silver, and aluminum also saw significant price increases (between 14% and 23%).
The results are a little more varied for agricultural products. Cocoa was down as much as -22%; sugar was down -13%. Rice is experiencing cyclical increases in price, which allow you to make interesting gains. Despite its volatility, remember that the change in the price of commodities comes in cycles. So the commodity price which fell yesterday will rise again in the future. Eventually, you will find yourself in a good position to resell your commodities at the highest price and therefore make a profit.
What are good commodities to invest in
If you have wondered what good commodities to invest in are, the first thing to take a look at what shapes these commodities’ prices. And what shapes prices is the demand and supply ratio, as well as the level of production. From that perspective, it is advisable to invest in crude oil, gold, and base metals ( copper, zinc, nickel, aluminum, lithium) since they have broad use for different purposes. You should also consider agricultural products such as coffee, cocoa, cotton, rice, soybeans, wheat, and sugar.
How To Invest In Commodities
The commodities market is now accessible to everyone through multiple financial institutions. You can participate in the market in different ways.
- First, you can invest directly in commodities by making small purchases of bullion or gold coins.
- You can invest in options and “futures”. You don’t invest directly in commodities, but you invest in a contract. It allows you to buy contracts where the quantities and prices of commodities sold are fixed in advance.
- Also, you can observe the markets and anticipate a rise or fall in prices. When commodity prices rise, you position yourself as a seller. When the price is going down, you position yourself as a buyer. You change roles according to market opportunities.
Should you invest in commodities?
Commodities are very volatile, and their predictability is relative. You can use past price fluctuations or historical data to determine their earning potential. You can rely on major historical events and those in progress to guess how their prices will evolve. Commodities are a challenging way to invest for people who want to diversify their portfolios and their ways of trading. But beyond the financial aspect, they are also an interesting observation laboratory for the functioning of the world economy.