Commodity Trading

What are commodities?

Commodities are simply assets which can be used or exchanged for other assets. From owning a gold ring, and using it as a wedding band, to having a divorce, and needing to exchange it for cash. Commodities are an everyday part of life, we all own some version of a commodity. Although commodities are there mainly for end user consumption, there are other ways in which they are used, especially within financial markets.

Below we explore these ways, and analyse the ways in which you can be involved in these markets from a speculative perspective.

Understanding commodity trading

Aside from day to day consumption, commodities can be utilized in several other ways. Particularly in a speculative sense. In times past commodities were exchanged for other commodities, or even labour. In a modern sense commodities are mainly transacted in exchange for money, however the value of the raw commodities are now based on supply and demand and market uncertainty. Let’s explore.

Best Brokers for Commodity Trading

eToro
Key Features
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Min Deposit
$50
United States
Start Trading View key features
Key Features
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Top Coins
  • ETH
  • NEO
  • ADA
  • BTC
  • XLM
Payment Methods
Wire Transfer, Bank Transfer
eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Cryptoassets are highly volatile unregulated investment products. No EU investor protection. eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.
FOREX.com
Key Features
Trade on popular Crypto markets
Go long or short on cryptos from 10p a point
A trading partner you can trust
Min Deposit
$50
United States
Start Trading View key features
Key Features
Trade on popular Crypto markets
Go long or short on cryptos from 10p a point
A trading partner you can trust
Top Coins
Payment Methods
Debit Card, Bank Wire, ACH, Credit Card, PayPal
Founded in 1999, part of GAIN Capital Holdings. Licensed in highly regulated juristictions, FCA, IIROC, NFA, CFTC, CIMA,FSA. Payment methods ACH, debit card, bank wire transfer. $50 minimum deposit.
Forex trading involves significant risk of loss and is not suitable for all investors.
CEX.IO
Key Features
Margin Trading
Legal compliance
Cryptocurrency staking
Min Deposit
$20
United States
Start Trading View key features
Key Features
Margin Trading
Legal compliance
Cryptocurrency staking
Top Coins
  • BTC
  • ETH
  • USDT
  • DOGE
  • BCH
Payment Methods
Credit Card, Debit Card, Wire Transfer, Cryptocurrencies, Skrill
Cex.io offers exchange of fiat currency for Bitcoin Ethereum, Tether, and 23 other cryptocurrencies, as well as Bitcoin/Ethereum trading against the USD.

Supply and Demand example

So going back to the example of the gold ring being used as a wedding band. The rings are created and crafted from the raw metal which is gold, so if we say hypothetically a new law would be passed, requiring every single person on earth, to marry, you will see an absurd increase in the price of Gold as a commodity as the demand for it would be through the roof.  So let’s say that there were rumours that this could be on the cards, a speculator may buy Gold in hope of a rise in price. However if found to be fake news, sell as they know the value will drop on the news.

Although we don’t foresee such an occurrence taking place, there are other more realistic catalyst for movement in prices of Commodities. For example recently where we saw an attack on the oil production line in Saudi Arabia, wiping out 5% of the world’s total oil supply, we saw a significant rise in price. However soon after President Trump tweeted, that the US would fill the supply glut, meaning the initial price rise reversed, as the lack of supply was no longer a factor increasing the level of demand.

Traders and speculators of commodities look at a variety of factors which would affect the price, and then speculate on the direction they believe price could be heading to as a result.

What commodities can be traded?

Historically before fiat currencies, and the exchange of commodities for money, individuals would have exchanged a bar of gold, for a herd of sheep, or coffee beans for labour service, or even rice for silk etc. Then with the creation of currencies, those commodities were assigned a dollar value, and purchased instead of exchanged.

There are various commodities which can be traded and these are usually broken down using the following tiers. Seen as hard and soft.

Soft commodities 

  • Livestock – meats etc
  • Agricultural – cotton, coffee, rice, sugar etc

Hard commodities

  • Metals – copper, gold, silver etc
  • Energies – Oil, gas etc

What are the most popular commodities to trade?

Popularity in commodity trading is always relative to two main factors. These, of course, are the supply and demand. The greater the demand and the easier it is to access supply, the more liquidity will be involved, which is the core aim of trading, generating returns. We know and it goes without saying that the Forex markets are the most liquid markets, however commodities are among the markets which rank high in terms of popularity.

That said, which of the commodities as individual assets are highly traded? These would predominantly be the hard commodities, metals and energies, or to be more specific Oil and Gold. Let’s explore the specifics on how there are operated in a trading sense.

Gold

Gold historically was the de facto currency prior to the introduction of the FIAT monetary system. Any exchange of goods or services which wasn’t commodity for commodity or commodity for labour would have been settled with a payment of gold. However with the physical burden carrying lumps of gold carried, exchanges began taken place with IOU slips used as a bank note, meaning that the issuer was depositing a gold bar with a central party/bank, then in order to liquidate this the receiver would take this note to the central party in exchange for the gold etc.

These IOU’s then went on to become the everyday currency we see today. Pegged to the US Dollar, gold is often now viewed as the safe haven currency to dollar negative news or global market uncertainty. So when we see the price of gold going up, we would likely see events occurring leading to a weakness of dollar related assets. 

Oil

Every one of us directly or indirectly use oil, from cooking oil, to oil in beauty products, to the diesel or petroleum used to fuel our vehicles. Oil prices simply are all based on supply and demand. The supply and it’s increase or reduction, directly impacts the demand and the value per barrel. Also pegged to the US Dollar, like most commodities, Oil usually moves whenever we see tensions which could impact the flow of supply.

So in the middle east where a huge percentage of the world’s oil is located, whenever we see a war, or threat of tension in the region, creating uncertainty prices fuel up, no pun intended. 

However in looking at the volatility created by the supply and demand of these 2 commodities, you see why traders looking to speculate on price movement, as the prospect of significant movements in price, create a desire for involvement not seen in many other markets.

How to Trade Commodities

Trading commodities is just like trading any other asset, as mentioned it’s a case of buying low and selling high. With CFD’s now a big instrument in the trading world, it means you can trade almost any asset without actually owning the underlying asset. Actually buying oil or gold and making money from it would involve a lot of investment, whereas using a CFD, you are leveraged and can then profit from small fluctuations in the price.

Get Started Trading Commodities

Before you can start trading commodities you are going to have to open a brokers account, see here for our preferred brokers to use.

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