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Commodity Trading and Investing

17 minutes
Intermediate
Cristian Cochintu
Cristian Cochintu
05 June 2024

Find out what are commodities and how you trade them – including some alternative ways to invest in commodities, what moves commodity prices, and a few things to watch out for along the way. 

Commodities, such as precious metals, energies, agricultural products and more, move based on their own highly specific industry conditions. That can make them attractive trades when you’re looking to diversify your portfolio. There are a variety of ways that you can get exposure to the price of commodities. 

However, commodities are highly volatile and returns can be unpredictable. Trading commodities is complex because factors like weather events and political strife that are often difficult to predict can have an outsize impact on prices. 

Commodities Trading and Investing – Quick Guide 

  • Select a commodity market: Focus on the most traded commodities in the world, like oil and gold, soft commodities like wheat or coffee, or companies that are involved in the mining or extraction of any type of commodity. 
  • Choose your strategy: You can speculate on commodity spot and futures prices by choosing to go short or long through leveraged productss. You can also trade leveraged products on commodity-linked stocks and ETFs or buy them outright (trade real shares). 
  • Open your position: Fill in our online form to create an account. Trade leveraged products on commodities like Gold, Oil, and Gas with spreads starting from zero and no commissions

      

For a more comprehensive overview of how to trade and invest in commodities, follow our in-depth guide below. 

What are commodities? 

Commodities are natural resources or agricultural products that are grown, mined, or processed and are critical inputs in the production of food, energy, and clothing. 

There are two main types of commodities: 

‘Soft’ commodities that are grown or reared: livestock and meat, together with agricultural commodities, such as coffee, wheat, soybeans, cotton, and corn;  ‘Hard’ commodities that are mined or extracted: energy products, such as crude oil, natural gas, coal, and petrol, and precious and industrial metals, including gold, silver, palladium, copper, lithium, and aluminum. 

Commodities of the same quality or grade are often described as ‘fungible’, meaning that they are interchangeable, irrespective of where they were farmed, produced, or mined. 

You may also see commodities divided into more specific categories to account for their different purposes or the processes that are involved in their production. These categories include: 

Energies: traditional energy sources such as brent and crude oilnatural gas, and heating oil;Agricultural: commodities grew for human consumption – such as wheat, corn, cocoa, sugar, coffee, or orange juice.Metals: mined commodities including goldcoppersilver, platinum, and palladium;

Commodity_Trading.png

What is commodity trading? 

Commodities trading works in the same way as speculating on any other market, in that buyers and sellers come together to exchange goods. The only difference is that commodities can be bought and sold at a current and future price. 

There are a variety of ways that you can get exposure to the price of commodities. The steps you’ll need to take to buy and sell commodities will depend on whether you’re trading futures, spot prices, options, or investing in stocks and ETFs. 

Trading commodity futures 

While it’s possible to trade in physical commodities, it’s far more common to trade in futures contracts. In its simplest form, a futures contract allows producers and buyers to agree on a price and terms for the delivery of a commodity at a set future date.  

So, if an airline company believes that fuel prices will rise, it might mitigate this risk by buying a futures contract in oil – a process known as ‘hedging’. This helps both the buyer and the seller to ‘lock in’ their price. If the price of oil rises, the seller has sacrificed potential profit but has received certainty in return. 

As with shares, the price of futures contracts varies with supply and demand. Professional commodity traders bet on the future price of a commodity – if they expect a price rise in a commodity, they’ll buy futures with the intention of selling them later at a higher price. 

When you trade futures with us, what you’ll actually be getting is a derivative product on the underlying futures price. You won’t have to enter into a futures contract, so at expiry, we’ll roll over your futures contract into the next month, unless you manually close your position. 

 

Trading commodity spot prices 

While futures prices reflect how much the markets believe a commodity will be worth when the future expires, spot prices show how much it is worth right now – or ‘on the spot’. 

Our ‘spot’ prices are based on the nearest futures on the market in question. They reflect the underlying market but with no fixed expiries, making them suitable for both beginners and experienced traders. 

Once you’ve created your account and logged in, you can trade spot prices in commodities through our award-winning trading platforms and apps. 

 

What moves a commodity's price 

Commodities' prices are driven by the forces of supply and demand, which means there are a variety of factors that can impact them. 

  • Competition: The introduction of alternative technologies and goods can reduce the demand for older commodities. For example, the rise of renewable energies has significantly reduced investment in oil and gas. New companies can also have a knock-on effect in the market – especially those with more efficient supply chains and faster production lines, as these will lower costs and be more appealing to shareholders. 
  • Politics: Political events and policies can cause changes in prices if they have an impact on exports and imports. For example, increases in import duty can drive up prices. 
  • Macroeconomics: A weak economy often lowers the demand for commodities – especially those involved in building and transport. Whereas a booming economy can result in increased demand which could lead to higher prices. 
  • Seasonality: Agricultural commodities are particularly dependent on seasonal cycles that impact production and harvesting. Prices tend to rise when harvest forecasts are positive and decline after the harvest when the market is flooded with products. 
  • Weather: Extreme weather changes and natural disasters can impact natural material production and transportation. For example, colder temperatures can freeze the ground or compromise the goods. Anything that impacts the supply chain, decreasing output, can cause market prices to rise. 

Why trade and invest in commodities? 

There are two primary reasons for investing in commodities, particularly in times of economic volatility and high inflation: 

A hedge against the erosion of purchasing power 

Inflation reduces the ‘real’ value of a currency over time, in other words, $10 today buys you less than it did 30 years ago.  

Inflation in the largest economies of the world recently hit a multi-decade high, which impacts the returns of certain asset classes. For example, if companies struggle to pass on higher costs to consumers, share prices are likely to fall if profits are squeezed, while high inflation also reduces the value of the income paid on fixed-rate bonds.  

Commodity returns, more specifically Gold, have historically been positively correlated with high inflation, in other words, returns increase when there are concerns about inflation diluting the purchasing power of fiat currencies (particularly those most widely held, like the USD and EUR).  

Portfolio diversification 

Along with cash, shares, bonds, and property, commodities are another form of asset that can help investors to diversify their portfolios. Diversification offers a form of protection against one asset class underperforming and may help smooth the overall volatility of your portfolio. 

As mentioned earlier, commodities like Gold typically perform well when markets believe growth will lead to inflation or they believe that stalling growth will lead to rising deficits and/or money printing that could cause inflation. However, commodity prices are also impacted by factors such as the weather, natural hazards, and geopolitical events. 

Coffee futures recently hit their highest level in a decade, with Arabica prices doubling over the last year as a result of dry weather in Brazil and an increase in shipping and labor costs, while the price of natural gas rose by more than 30% after Russia’s invasion of Ukraine. 

Which commodities have delivered the highest returns? 

Commodities have had a very good run recently on the back of supply chain disruption and rising prices. The S&P GSCI (a broad-based index of 24 commodities) returning 42% in 2021 and 26% in 2022. 

Let’s take a closer look at the top three commodities by annual returns over the last five years: 

20182019202020212022
Palladium (19%)Palladium (54%)Silver (48%)Coal (161%)Nickel (+43%)
Wheat (18%)Crude oil (34%)Copper (26%)Crude oil (55%)Natural gas (+20%)
Corn (7%)Nickel (32%)Palladium (26%)Natural gas (47%)Wheat (2.8%)

* Past performance is no guarantee of future results 

Overall, there’s been a wide range of different commodities in the top three, from metals and agricultural products in 2018, to energy-based products in 2021.  

2022 was an unprecedented year for the European gas market. Prices repeatedly reached new highs. This set the stage for major market shifts and changes in consumption patterns and triggered price-ceiling discussions. 

Gazprom’s suspension of most of its piped supplies to the EU lifted prices and made Europe a premium market for uncommitted LNG cargoes while acting as the catalyst for the construction of several new LNG regasification terminals across Europe. 

The elevated prices helped bring more LNG to the continent, replacing most of the Russian supply. Nickel has emerged as the clear winner among base metals that have survived a volatile year. 

LME suspended nickel trading for several days following the massive rally, sparked by fear of supply disruptions after Russia’s invasion of Ukraine. A short squeeze by one of the biggest Chinese steel manufacturers, Tsingshan Holding Group, also fuelled nickel’s massive price rally. 

How can you trade and invest in commodities? 

There are several ways to invest in commodities, depending on whether you want to buy or trade the commodity itself or invest indirectly. One option for buying a commodity in its physical form is to consider buying gold or other precious metals, although this comes with challenges in terms of storage and trading. 

It is also possible to trade in commodity futures or spot prices (via contracts for differences), however, these are leveraged products. You would also need to open a trading account with an online trading platform such as CAPEX.com. 

Investing in commodity-based shares and funds can provide indirect exposure to commodities, without the risks of trading directly in commodities. However, this is less liquid and may involve a larger initial deposit to get started. 

1. Trade Commodities Directly 

You can speculate on the price of raw physical assets, such as gold, silver, oil, wheat, and sugar. With us, you won’t have to take ownership of the underlying asset or worry about physical delivery. It’s more liquid than trading it in other ways and you can trade it 24 hours a day, Monday to Friday. 

Gold trading

When you trade commodities on leverage using financial derivatives instruments like leveraged products, you do not have to put down the entire value of a gold ounce or barrel of oil. Instead, you’ll put down a deposit to open a larger position, with profits and losses calculated on the full position size. This means your profits and losses can significantly outweigh your margin amount, so ensure you use risk management tools (like stop loss) when trading. 

You can go LONG if you think the price will rise or SHORT if you think the price will fall. 

 

2. Buy or trade commodity ETFs 

Exchange-traded funds (ETFs) are investment instruments that hold an asset type or basket of assets, such as commodities or stocks. Some ETFs will hold the physical assets they’re invested in – e.g. a gold ETF could hold a certain amount of gold bullion or coins – while others use more complicated investments to synthetically mimic the underlying market. 

ETFs can be a great way to gain exposure to a range of commodities or commodity-linked stocks from a single position. 

  

Investing in Commodity ETFs is how many longer-term investors get exposure to the market. You can do this with share dealing. Here, you’d buy upfront, based on the full value of the ETF, and hold until you want to sell. 

You could also trade Commodity ETFs on leverage, but bear in mind this offers lower liquidity and higher spreads than trading the commodities directly. Leveraged trades mean you can go long or short on Commodity ETFs. However, total profits or losses can significantly outweigh your margin amount, as both are based on the total position size. 

According to Trustnet, there are over 400 commodity-related exchange-traded products to choose from, with two main types: 

  • Commodity ETFs either hold the commodities in physical form or more usually, build a portfolio of futures contracts 
  • Commodity index ETFs that track the price of a single commodity index, such as crude oil or gas, or track a broader index such as precious metals, clean energy, or agricultural products 

 

SPDR Gold Trust (GLD) 

SPDR Gold Shares is the largest physically backed gold exchange-traded fund (ETF) in the world, with over $57 billion worth of AUM and the biggest gold ETF available to trade with CAPEX.com. 

SPDR Gold Trust (GLD)

GLD tracks the price of gold by holding gold bullion in a trust kept in the form of London Gold Delivery bars of 400 ounces, held in an allocated account. The physical gold is held by the custodian in a vault in London or in the vaults of other sub-custodians. 

PowerShares DB Commodity Index Tracking Fund 

The Index is a rules-based index composed of futures contracts on 14 of the most heavily traded and important physical commodities in the world. The Fund and the Index are rebalanced and reconstituted annually in November. 

PowerShares DB Commodity Index Tracking Fund

The value of the Shares of the Fund relates directly to the value of the futures contracts and other assets held by the Fund and any fluctuation in the value of these assets could adversely affect an investment in the Fund's Shares. 

United States Oil Fund, LP (USO)  

The United States Oil Fund (USO) seeks to track the daily percentage price changes of light, sweet oil delivered to Cushing, Oklahoma – better known as West Texas Intermediate, or WTI.  

United States Oil Fund, LP (USO)

WTI is the lightest, sweetest oil of the major benchmarks, meaning it has low sulfur and is of high quality. All WTI is produced in the US.  

USO is a gas & oil ETF, so, its holdings are intended to help it track the price of WTI. It mostly achieves this using futures contracts, although it also holds US Treasury bills.  

3. Buy or trade commodity-based ETFs 

Commodity-based funds pool money from investors to invest in a range of companies involved in the mining and production of commodities including agriculture, natural resources, clean energy, and timber.  

As mentioned above, you can buy shares of funds outright or you can trade the price movement without owning the underlying asset. Here are a few of the most popular ones: 

Energy Select Sector SPDR® Fund (XLE)  

The Energy Select Sector fund is venerable in terms of ETFs – it was launched all the way back in 1998. It tracks the Energy Select Sector index, which includes large-cap companies across the US involved in oil and gas, as well as energy equipment.  

XLE’s top holdings are Chevron Corp, ExxonMobil, and ConocoPhillips, three of the biggest US petroleum companies.  

iShares Oil & Gas Exploration & Production ETF (IEO)  

The iShares Oil & Gas Exploration & Production UCITS ETF invests in stocks with a focus on the Energy world. The dividends in the fund are reinvested (accumulating).  

4. Buy or trade commodity-based stocks 

Another way to invest indirectly in commodities is to trade or buy shares in companies that produce, mine or process commodities or related businesses.  

Higher commodity prices allow companies to sell their products at a higher price – if production costs remain the same, this leads to an increase in profitability. However, share prices are also impacted by company-specific factors, together with broader geopolitical and environmental issues.  

Investing in a commodities-related company provides the opportunity for capital growth if the share price rises, along with income in the form of dividends. A dividend is a cash payment to shareholders, usually made once or twice a year.  

You can trade commodity stocks without having to take ownership of shares, using derivatives. Stock trading in UAE is leveraged, so you can go long or short. 

You can also Invest in stocks with zero commission charges (terms apply) on our investing platform and own actual company shares outright.  

 

Mining companies 

Mining stocks are publicly traded companies focused on finding, extracting, and processing deposits of valuable minerals and materials. In the mining sector, Glencore (GLEN) is an Anglo-Swiss producer and miner of more than 60 commodities, including cobalt and nickel.  

Mining companies

Exposure to commodities that assist decarbonization and energy transition under climate change concerns continues to keep Glencore in the gaze of investors. 

Gold stocks are companies that mine and sell gold or streaming and royalty companies, that pay up-front fees to mining companies. 

 

Barrick Gold Corp (ABX) is one of the largest companies in the gold mining industry – both in terms of its operating size and the amount of gold produced.   

Barrick Gold Corp has operations across the globe, with mines in the US, Tanzania, Canada, the Democratic Republic of Congo, Mali, and Argentina – to name a few. 

Oil and gas companies 

Most gas and oil stocks fall into one of a few major categories. There are companies that find and pump oil, companies that provide oilfield services, companies that refine oil, and integrated companies that do it all. In addition, there are some specialized companies that own and operate oil pipelines. 

While the world is looking to move away from oil and gas, these markets still have a role to play for some time to come, according to analysts.  

They believe that oil and gas companies such as BP and Shell will play a role in the transition to cleaner energy as they look to increase their renewable footprint. 

Shell (SHELL) is a British-Dutch company that produces and refines oil and natural gas. Its share price has remained flat over the past 5 years, however, shareholders purchasing Shell shares two years ago would have enjoyed a 57% increase in share price. It has a current dividend yield of 3.2%.  

Agricultural companies  

Agricultural companies are developing technologies to modernize farming practices and using artificial intelligence to provide ‘precision agriculture’.  

These include the calibrated fertilization and watering of crops to increase production, together with the use of “artificial intelligence to differentiate between cultivated plants and weeds”. 

Wabash National is a transportation and logistics company with products such as refrigerated, platform, and tank trailers. The company also produces processing equipment like tanks and silos to store various goods.   

Agricultural commodity stocks

Commodity Market Outlook 2024 

According to the International Energy Agency, the global economic slowdown is a key downside risk for commodity markets in 2023. Slowing manufacturing activity amid softer consumer and B2B demand, as well as weaker capital investment due to high borrowing costs and lingering recession concerns, are expected to dent demand for energy and metal commodities. As consumers pull back on spending amid high inflation, food commodities will also suffer from weaker demand, as per the IEA estimates. 

On the other hand, the anticipated increase in demand from China following the end of its zero-COVID policy, the slower-than-expected recovery of Western economies, and potential supply disruptions brought on by geopolitical tensions and extreme weather events could all work to push prices higher over the course of the year for all commodity groups. Also, the anticipated US dollar depreciation from last year's highs could increase commodity demand and prices in 2023 since a weaker US Dollar makes commodities priced in US dollars less expensive in non-dollar currencies. 

Energy prices are set to average lower in 2023 compared to last year amid weaker global demand prospects and a healthy supply outlook: 

Gold forecast and price predictionOil forecast and price prediction
Natural Gas forecast and price predictionSilver forecast and price prediction

Summary 

Commodities may offer investors a potential hedge against inflation, and short-term trading opportunities, together with a means of diversifying their portfolio across different assets.  

Depending on your preference and appetite for risk, you may choose to trade or invest in commodity-based products such as ETFs and shares or trade directly on the commodity spot and futures prices through leveraged products. However, it is important that any investment in commodities forms part of a diversified portfolio. 

leveraged products can be advantageous if you’re a trader with a short-term horizon. This is because derivatives trades enable you to speculate on the price of an asset by going long (buying) or going short (selling).  

You might want to trade commodities if: 

  • You want to speculate on the price of commodities rising or falling 
  • You want to leverage your exposure 
  • You want to take shorter-term positions in commodities 
  • You want to hedge your portfolio 
  • You want to trade without owning the underlying asset 

When you buy stocks and funds, you’re taking direct ownership of shares in a commodity-based company or commodity ETF. Buying with ownership might be preferable if you have a positive long-term outlook on that share or ETF because you’ll stand to benefit from any price increases. You could also receive dividends and voting rights if available to shareholders. 

Leverage isn’t available when you’re buying directly, so you’ll have to commit to the full value of the position upfront. But this also means that your maximum risk is capped at the total cost of your investment.  

Remember that, when you invest, you can only profit when share prices or the value of an ETF rises above the price at which you opened your investment. 

You might want to invest in commodities: 

  • You’re interested in buying and selling commodity-based stocks and ETFs 
  • You’re focused on longer-term growth 
  • You want to build a diversified portfolio 
  • You want to take ownership of the underlying asset 
  • You want to gain voting rights and dividends (if paid) 

With the CAPEX.com platform, you can either trade on commodities prices for speculation or hedging or invest in stocks and ETF-linked commodities.  

You will gain access to 2.100 leveraged products on commodities, stocks, and other assets through a CAPEX trading account or to +5.000 stocks and ETFs listed on 10 exchanges through a CAPEX Invest account. 

Free resources 

Before you start investing and trading in commodities, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more informed investment decisions. 

Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading. 

FAQs about Commodity Trading 

The information presented herein is prepared by capex.com/ae and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only.Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience, or current financial situation. 

Key Way Markets Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.

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Cristian Cochintu
Cristian Cochintu
Financial Writer

Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.