Commodities are not the first assets people think of for investing. However, they are the basis of the economy and its functioning, particularly with regard to the energy or agricultural sector.
We are going to see how to invest in commodities by doing commodity trading , what return to expect and what parameters to take into account when trading!
What is a Raw Material?
Raw materials are all raw products that can be used to make a final product . In the financial world, commodities are assets that can be traded on financial markets. There is a very wide variety of raw materials. For example investing in gold , oil , gas, or even cotton.
Commodities have a market price which is determined by the law of supply and demand . When the demand for a commodity increases, at constant supply, the price increases. Conversely, at constant supply, when demand decreases, the price also decreases. It is this balance between supply and demand that determines the market price .
Invest in raw materials
How Does Commodity Trading Work?
- By trading the physical asset
- By trading a CFD or other types of contracts
By trading the physical asset, your capital gain or loss will be directly correlated to price movements . However, if you are trading the physical asset, you must be able to store the asset. You can also find an intermediary capable of storing your raw materials, but this will have a cost. For commodity trading, we advise you to systematically go through CFD trading .
In all cases, to be able to trade commodities, you will need to invest with an intermediary called a broker (or broker). Many online solutions are available for trading commodities.
Example of Commodity Trading in CFD
Let's take a simple example for CFD trading:
- You sell 100 CFDs, on coffee, with a leverage of 10, estimating that the price of the asset will decline in the coming weeks or months. The course is $50 . You must therefore invest $500 (because the leverage effect is 10). After a month, the course ends up at $45 . You then want to take your profits . You will need to buy back 100 CFDs to close your position.
- In the case, you realized a capital gain of 100 * (50 – 45) = $500. It will be necessary to withdraw the costs from this capital gain.
- With CFDs, you can bet on both the upside and the downside of an asset .
Trading Commodities: Commodity Trading Tutorial
- Step 1: Choose a commodity broker (we recommend eToro )
- Step 2: Form your commodity trading strategy
- Step 3: Open an account with a commodity trading platform
- Step 4: Account verification and deposit of funds
- Step 5: Purchasing raw materials
Step 1: Choose a commodity broker
The first step to investing in commodities is to open an account with a recognized broker.
eToro: The world leader in copy trading on commodities
Since its creation in 2007, the eToro broker has more than 11 million customers around the world. Famous in particular for its social trading , a feature through which it is possible to duplicate the positions of the best traders, the eToro broker is also distinguished by the possibility of trading commodities. With eToro, it is also possible to trade cryptocurrencies, stock indices or even shares.
The advantages of trading commodities with eToro:
- Social trading is an opportunity to generate capital gains
- 19 different raw materials
Invest in Commodities
eToro : A wide range of choices
What characterizes the eToro broker is its substantial offer of financial assets. If you want to get into trading, the platform allows you a very interesting diversification strategy . From stock indices to stocks, ETFs, or crypto-currencies, there is no shortage of investment possibilities. With eToro , you will also be able to trade Forex . The platform is also present in 27 countries around the world.
The advantages of trading commodities with eToro :
- More than 200 assets available on the platform Trading Commodities
Step 2: Form your commodity trading strategy
Commodities trading lends itself to several different investment strategies, more or less long term. It's up to you to select the one that will be most appropriate for your profile.
- Day trading commodities: Day trading is a trading technique that consists of opening and closing positions during the same day .
- Swing trading has a longer speculative horizon.
- Scalping on commodities : This involves trading and going back and forth a lot between taking positions and closing.
- Trade with Expert Advisors : they allow automated trading via a robot that you develop yourself or buy online.
Step 3: Open an account with a commodity trading platform
Go to the broker of your choice, and simply complete the registration form. It will only take you a few minutes before you can proceed to the next step.
Step 4: Account verification and deposit of funds
All brokers regulated by regulatory bodies are required to verify the accounts of their users , in accordance with the KYC (Know Your Customer) protocol. You will need to submit two documents:
- An identity document (national identity card, passport or driving license)
- Proof of address (all bills except mobile phone bills).
Before or after verification, you will also be able to deposit funds into your account via the blue “Deposit Funds” button. Among the deposit methods available:
- A credit or debit card
- A Bank transfer
- Rapid Transfer
Step 5: Purchasing Raw Materials
In the search bar of the trading platform, simply enter the name of the asset you wish to buy and click on it. We took gold as an example:
All you have to do is indicate the amount to invest, your stop loss/take profit and confirm the transaction by clicking on “Open position”!
Invest in raw materials
What categories of raw materials exist?
- agricultural products
- energy products
- metal products
- The cotton
- The corn
- The Orange juice
- Livestock (live and as meat)
The prices of these products will have a direct influence, particularly on the price of livestock and livestock products whose diet is partly made up of cereals. A rise in the prices of products such as soybeans will have a concrete impact on the price of livestock.
They are also very many corn will not all be available depending on the broker you use. Here is the list of the main raw materials related to energy:
- Oil (Brent and Crude)
- domestic fuel oil
- Unleaded gasoline
- natural gas
Metal products include precious metals such as gold as well as other materials used, for example, for construction. Here are the main metallic raw materials:
- iron ore
- The copper
- The lead
The main raw materials
A 2018 study established the 10 most traded commodities , based on an analysis of the 40 most traded futures contracts in the previous year:
- Brent crude oil
- Crude oil: West Texas Intermediate (WTI)
- iron ore
- The corn
- The copper
In particular, we see that the most traded commodities are also those that are most in demand because they are the most used in different parts of the economy.
If we take the example of oil, it alone represents more than a third of the world's energy consumption . It is therefore inevitably one of the most used raw materials because it involves the whole economy.
Invest in raw materials
What affects commodity prices?
As with any asset, the price of commodities is largely driven by the law of supply and demand .
Good to know : Through taxation or legislation, the public authorities can have an impact on the price of a raw material.
The Offer: The First Part of the Equation
Many factors affect the supply of a raw material. They all have a more or less strong influence depending on the raw material in question.
If we take the example of weather conditions , these could have a real impact on agricultural production in certain regions of the world. Heat waves, excessive rainfall, hail will be events that will have a role in the production of products such as cocoa, cotton or coffee.
Other parameters such as government intervention on regulatory issues may have an influence. If a country decides to tax the entry of raw materials from outside, this will have an impact on the price of said raw materials.
Finally, certain parameters such as war, health crises or even geopolitical tensions can have a very strong influence on the supply of a raw material. This is often the case with the oil supply, which is often used as leverage.
Demand: the second part of the equation
The demand for a raw material can be affected along several axes as well. Changing consumer habits or even certain events such as crises can profoundly modify demand. The appearance of substitutes can also significantly vary the demand for a good.
Another factor of short-term variation in demand is the evolution of the exchange rate . Commodities are essentially quoted in dollars. As a general rule, when the dollar rises, the price of commodities will tend to fall . This decrease will in turn cause an increase in demand.
Raw material prices: evolution of the main raw materials
We will see in this part the raw material price to understand how the prices of the main raw materials such as oil, gold, copper, corn and cocoa have evolved during the recent period, marked by the economic slowdown linked to to the impact of the coronavirus.
The price of oil
The oil market has rebounded strongly since its lowest level reached in the last 5 years last April. On April 21, 2020, the barrel also went into negative territory due to a lack of demand, particularly from the airlines.
Nevertheless, oil prices have risen sharply since April even though they have not yet returned to their level at the start of 2020 at more than 60 dollars per barrel.
The price of gold
The gold market has benefited greatly from the coronavirus effect, with investors turning to safe havens such as the yellow metal to protect their portfolios from the market turbulence of recent months.
Against this backdrop, gold prices hit an all-time high near $2,050 an ounce before starting to correct.
Copper is one of the metals most dependent on the evolution of the economic situation, being used in particular in the field of construction and infrastructures.
This explains why prices fell sharply during the start of the health crisis at the start of 2020 before rising sharply, going from 2,000 dollars per ton to nearly 3,000 dollars per ton at present. Investing in copper should therefore be put into perspective with industrial and global growth.
Corn has not suffered too much from the coronavirus effect.
Indeed, this cereal is mainly used to feed livestock. It is therefore little affected by the economic situation. As a result, corn prices have remained relatively stable over the recent period, hovering around 370 cents per bushel.
The price of cocoa has recovered strongly since this summer, rising from 2,000 dollars per ton to more than 2,600 dollars per ton.
This is due to the current political uncertainties in Cote d'Ivoire, the world's largest cocoa producer, where presidential elections took place at the end of 2020.
Invest in raw materials
Risks affecting commodity prices
- Geopolitical risks and commodity prices
- Climate risks and commodity prices
- Consumption habits
- The risk of rapid capital loss with leverage
Geopolitical risks and commodity prices
This is true for all raw materials, but especially for oil and gas which, in times of tension between two countries , can become a commodity for negotiation. This is particularly the case when a country refuses to export to others or when certain states take isolation measures against countries.
Climate risks and commodity prices
This is particularly true for trading agricultural commodities . A bad year, violent hailstorms or even a long drought can lead to a drop in the world supply of a product. This will often result in higher prices as the product is more scarce.
It is estimated that the exchange of raw materials is 25% from speculation and 75% for consumption. Nevertheless, each of them remains subject to the consumption habits of end consumers. This can dramatically change prices and cause investors to lose or gain money.
The risk of rapid capital loss with leverage
On brokers , most commodities have a leverage effect of up to 10 and even up to 20 for gold . If leverage can make you win faster but also make you lose. Understanding the Stop Loss and Take Profit levels is also important when trading with leverage.
How much money can I make trading commodities?
As with any asset, your return will mostly depend on how much you invest and what commodities you invest in agricultural and mineral commodities.
How much would investment in commodities have brought me 5 years ago?
Let's take a simple example: an investment of €1,000 5 years ago on several different raw materials:
- Gold: + 64.6% or $1,646 today
- Copper: + 30.8% or $1,308 today
- Cotton: + 4.1% or $1,041 today
- Corn: – 1.2% or $988 today
- Wheat: + 17.9% or $1,118 today
- Soy: + 10.3% or $1,103 today
- Coffee: + 10.1% or $1,101 today
- Cocoa: – 16.2% or $838 today
- Sugar: + 14.4% or $1,144 today
- Natural gas: +0.1% or $1,001 today
Among this panel of 10 commodities, 8 assets have seen their prices rise over the last 5 years while only two have depreciated.
Invest in raw materials
How to do technical analysis on commodities?
Technical analysis consists of graphically studying the price or volumes traded of an asset , in order to predict its future evolution. One of the precepts of technical analysis is to consider that movements tend to repeat themselves, which is particularly true for commodities. Several tools are available:
- Bollinger Bands
- Moving averages
- Support and resistance levels
These tools serve as trading signals and are an excellent complement to fundamental analysis to know exactly when to invest in commodities.
Analysis by moving averages
The moving average is a moving average over a given period , which smoothes and erases transient fluctuations . The moving average also allows conclusions to be drawn about trends. Concretely, you will be able to identify bullish and bearish trends:
- Bullish : When the price of the day crosses the moving average upwards, it indicates a bullish trend.
- Bearish : When the price of the day crosses the moving average downwards, the trend of the asset is a bearish trend in the markets.
On the graph below, the smoothed moving average over the period is represented by the curve in blue.
Technical analysis via Bollinger bands
Bollinger bands are also among the most frequently used indicators for technical analysis. This tool will mainly inform the trader about the volatility of the market .
From this point of view, the graphic reading is quite simple:
- A calm market: the bands are contracting
- A choppy market: the bands are widening
Bollinger bands are an illustration via three curves:
- The upper curve represents the moving average to which we add X times the standard deviation
- The middle one represents the moving average.
- The lower curve represents the moving average from which we subtract X times the standard deviation
Usually X=2 . Bollinger Bands are based on a statistical rule that states that 95% of the representations in a series are between the mean + or – 2 * the standard deviation of the mean.
It is the difference between the high curve and the low curve which gives the indication on the volatility of the market. When the bands tighten, volatility decreases. When they diverge, volatility increases. As the following graph illustrates.
5 tips to follow to trade commodities well
- 1 – Understand the variables that influence the raw material in question
- 2 – Diversify your investments
- 3 – Pay attention to leverage
- 4 – Master your “Take Profit” and “Stop Loss” levels
- 5 – Master technical analysis tools
1 – Understand the variables that influence the raw material in question
It will be a question of properly mapping the variables that have an impact on supply and demand. Know your market . If you are trading gold, it is important to understand the demand (jewelers, institutions, speculators…). Similarly, if you are trading oil , geopolitics and understanding the issues is a decisive factor.
2 – Diversify your investments
You can only trade commodities while still applying a diversification strategy . It will then be a question of selecting products whose prices are not linked . If you are trading soybeans and cattle, these are two commodities that are linked, with changes in the price of soybeans having an impact on the price of cattle. Thus, your investments would not be diversified. If you are trading gold and soybeans, the price interdependence will be much less and your investment more diversified.
3 – Pay attention to leverage
This advice is all the more valid for novice investors. While leverage can make you win a lot, it can also make you lose everything. So be careful if you are new to trading.
4 – Master your “Take Profit” and “Stop Loss” levels
There is high leverage, setting relevant Stop Loss and Take Profit levels are vital for your trading. These are your minimum and maximum resale thresholds. If the price of the asset goes below or above, your asset will be resold automatically. If you analyze your positions using support and resistance levels , these elements will help you place your stops.
5 – Master technical analysis tools
These are tools that can be used with many assets including raw materials. As we have seen, they make it possible to establish trends in price movements. Many indicators exist but the use of all of them risks being counterproductive, we advise you to focus on 3 or 4 tools.
Invest in raw materials
Conclusion: how to invest well in commodities?
Investing in commodities has almost always been a winner, especially in periods of economic rebounds or inflation. Trading commodities with CFDs allows you to take advantage of both rises and possible falls in commodity prices!
Your main drag is the transaction cost associated with trading commodities. In order to maximize gains while limiting costs, you will need to invest with a reliable and recognized online broker such as eToro or Libertex.
Is it better to trade a commodity physically or its CFD?
Regarding other assets such as equities, we would be tempted to say that there are only a few differences between the two products. The trade-off between holding the asset physically or its CFD must take into account one parameter: storage. By physically trading, you will have to support the storage of sometimes very large products. This is unthinkable, both in terms of time but also in terms of cost. The only viable solution is therefore to trade commodities in CFDs.
Is commodity trading suitable for beginners?
Yes, it is quite possible to trade commodities as a beginner. Nevertheless, it is necessary to understand many variables, which is why we recommend training sufficiently in advance of an investment in this type of product.
Will gold remain a safe haven in times of crisis?
Yes. In any case, this is what investment in the metal tends to demonstrate during the health crisis. While consumer demand has collapsed, speculative demand has compensated for this collapse on the markets. The price of gold is also no lower than before the onset of the health crisis.
Are CFDs the only way to invest in commodities?
No, you can also trade physically but you will also need a large storage capacity. This method is far from optimal. Other asset classes also allow trading in commodities such as ETCs, ETFs, Turbos or even Warrants, each with their specificities.
What is the difference between short position and long position?
In CFD trading, the difference is fundamental. To speak of a long position means that you are long and that you are betting on the appreciation and the rise in the price of the asset in question. Conversely, in a short position, you bet on the fall in price. We also talk about a short position.
Commodity codes 2021
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