Commodities like gold, oil, wheat, or natural gas are important materials for everyday life and global trade. These raw goods are used in our everyday life, in what we eat, when we drive, build, or dress. However, other than everyday use, commodities are also valuable to traders for various reasons.
This article explains why commodities are a powerful trading tool, offering diversification, inflation protection, and opportunities from market volatility.
What are commodities?
Commodities are basic raw materials used in the economy and are mostly the same no matter who makes or grows them. For instance, a barrel of crude oil is basically the same as another one, irrespective of the producer.
Generally, commodities are categorised into hard commodities like metals, energy, industrial metals as well as minerals. The second category is soft commodities like agricultural goods, livestock and crops.
Commodities are standardised, trade on major exchanges, and are accessible to both producers and individual traders.
Why traders choose commodities?
Reduce risk through diversifying your portfolio
Diversification is one of the main advantages of commodity trading. There is commodities usually behave differently than more traditional instruments like stocks or bonds. This happens because the movements in their prices are impacted by supply and demand, geopolitical events, weather conditions or changes in the economy globally.
Since primary goods do not always move the same way as stocks and bonds, including commodities in your trading portfolio can potentially minimise the overall risk. While stocks might drop because of downturns in the economy, commodities like gold or agricultural products might keep their value. This balances out the performance of the portfolio in total.
As a result, traders often choose primary goods to hedge against unexpected shifts in other markets.
Hedge against inflation
Primary goods tend to perform well in inflationary periods, as rising consumer prices also lift raw material costs and commodity prices.
Gold has been considered a safe haven for a long time, retaining value when currencies lost it or when economies are unstable. Commodities can help traders protect their funds when prices rise and currencies lose value.
Global access to markets & high liquidity
Widely traded commodities like oil or gold are highly liquid, meaning that traders can enter and exit positions quite easily and fast. This is helpful when trading in fast-paced markets.
Supply and demand around the world is what affects commodity prices, not just one country. This allows traders to see and make the most of global trends. For instance, prices of crops can shift due to changes in weather.
Metals respond mainly to industrial demand and supply, while geopolitical events often affect energy prices. If you closely watch these factors around the globe, you can potentially spot various opportunities.
Flexibility when trading commodities
Commodity prices fluctuate more than stocks or bonds, driven by supply issues, demand shifts, and global events.
With high volatility, there’s usually higher risk. However, there are also more opportunities. For swing traders, short-term traders or those using breakout trading, commodities provide opportunities to generate revenue from both rising and falling price movements. This is another reason why primary goods are appealing to traders.
Traders can trade commodities with leverage, which means they can control a bigger amount with a relatively small initial deposit. This makes primary goods accessible to traders with limited capital. Leverage can help traders generate revenue, but it can also lead to bigger losses if the market moves the wrong way.
Traders have lots of options when trading commodites. You can trade CFDs on various goods based on what suits your strategy and depending on what affects their prices. Traders can diversify across commodities, since each reacts to different factors, offering more flexibility than other assets.
When to choose commodities vs traditional assets
Commodities tend to be more powerful than stocks or bonds during inflation periods when there’s an increased cost of living and currencies lose purchasing power compared to primary goods’ prices that often rise. This offers a hedge against inflation that traditional assets don’t.
During crises, commodities often rise while stocks fall. Supply shocks from politics or weather can trigger sharp price moves and create opportunities.
That’s why most traders see primary goods as a complement to traditional investments rather than as a replacement. It is their way to hedge, diversify, and go after global macroeconomic opportunities.
Commodity trading stands out because what drives prices is easy to grasp compared to stocks or bonds. Commodities mainly move because of supply and demand, weather or global economic changes rather than earnings reports and company news. This enables trading broader trends instead of company-specific factors.
Commodities are also flexible to trade. Traders can profit from both rising and falling prices and gain global exposure, as this market reflects worldwide demand. They can also choose from fast, short-term trades to longer-term positions. Combining simplicity, global connection and two-way trading is what makes commodities a unique asset class.
What to keep in mind when trading commodities
Trading commodities offers opportunities, but it also comes with risks. Their prices can rise or drop very quickly and there’s uncertainty caused by geopolitical tensions, weather conditions or disruptions in supply.
Effective commodity trading requires knowledge of global supply and demand, economic trends, and seasonal patterns. Revenue mainly comes from price movements, not dividends.
Who trades commodities?
If you are a trader who wants to spread your investments, protect your capital against inflation or try to profit from price changes, you can use commodities.
Traders with limited access can also trade commodities because of leverage. Those interested in global market trends can choose primary goods too since commodities are a reflection of global supply and demand cycles and economic changes.
Generally, commodities are for those looking for flexibility, global exposure, and are capable of managing risk actively.
Final thoughts
Commodities are more than everyday goods; they help spread risk, protect against inflation, help take advantage of changes in prices while staying connected to the global economy at the same time.
Considering that they often move differently compared to other assets, primary goods can stabilise things during uncertainty in markets or during periods of inflation and global changes.
Their flexibility in terms of trading style, asset type and market conditions make primary goods a valuable addition to a trader’s portfolio. While there are many advantages when trading them, there are always risks to consider.
DISCLAIMER: This content is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation.
