4 Of The Best Commodities To Trade For A Living

Oct 15, 2020 06:22 PM ET
4 Of The Best Commodities To Trade For A Living

Commodities are among the best assets you can trade in the market today. They tend to be more volatile than indices and their liquidity is equally good. Indeed, some of the best-known traders in the world focus on the industry. For example, Jim Rogers has spent decades trading and investing in the assets. Similarly, most investment banks make billions every year trading commodities. However, commodities are not created equal. In this report, we will look at some of the best commodities to trade for a living.

How to trade commodities

Most online brokers provide commodity assets in their platforms. These commodities are usually divided into four main classes:

  • Precious metals – These are metals such as gold, silver, platinum, and palladium. 

  • Base metals – These are metals nonferrous metals that are mostly used in the industrial sector. They include copper, nickel, and aluminium. 

  • Agricultural – These are agricultural commodities like corn, soybeans, cocoa, corn, and cotton.

  • Energy – These are commodities that are used to produce energy. They include, crude oil, natural gas, and heating oil.

Brokers offer these commodities in form of contracts-for-difference (CFDs), options, or futures. As a result, when you buy a commodity, it does not mean that you own a physical product. It simply means that you have bought a financial derivative that matches the price of the commodity. 

Trading commodities is relatively similar to how you trade other assets like currencies, cryptocurrencies, and stocks. You just need to know how to conduct their fundamental, technical analysis and price action. In fundamental analysis, you simply need to understand the demand and supply of the assets. On technical analysis, you need to understand how to use indicators like moving averages and the relative strength index.

Gold

Gold is one of the most active commodities in the financial market. As a precious metal, gold is usually different from other metals. For one, demand and supply dynamics rarely work when analysing the metal. That is because gold does not have a large industrial use. 

Instead, most of the mined metal is usually bought by central banks and investors. Central banks use it as a reserve while investors buy it to diversify their portfolios. They also buy it as a safe-haven and as a hedge against inflation. 

Therefore, gold price moves in reaction to the overall strength of the economy and the policies by the Federal Reserve. When the Fed is extremely dovish, its price tends to rise as the US dollar falls. On the other hand, when the Fed is hawkish, the US dollar tend to strengthen, causing its price to decline. For example, as shown below, in 2020, gold price reached an all-time high after the Fed brought interest rates to zero.

in 2020, gold price reached an all-time high after the Fed brought interest rates to zero

There are several reasons why trading gold makes sense. First, gold usually has loads of volume every day. Indeed, gold worth more than $37 billion is traded at the London Bullion Market Association every day. Second, gold tends to be relatively volatile, which creates vast opportunities for traders. Third, there are many free online resources that cover gold every day. However, the main challenge for trading gold is that its price is very expensive, which makes it an unprofitable asset to most day traders.

Silver 

Silver is often known as gold’s poorer cousin. This is because, while an ounce of gold sells for more than $1,800, an ounce of silver sells for less than $25. There are several reasons why silver is usually cheap. First, unlike gold, very few investors and central banks hoard the metal for its store of value. Second, while silver is usually classified as a precious metal, it is usually an industrial metal. Finally, unlike gold, silver is found in great quantities in countries like Peru, Mexico, and China.

Silver is an excellent metal to trade for several reasons. First, silver is one of the most actively-traded metals, meaning that it has vast amount of volume. Second, you can use silver as a proxy for gold. Since silver is cheaper than gold and because the two metals have a close relationship, it means that it can be more profitable to trade it. Third, there is vast amount of free online resources in the internet about the metal. Finally, silver is offered by most online brokers.

Silver price vs gold price

Silver price vs gold price

Crude oil

Crude oil is one of the best commodities you can trade in the market. Like gold and silver, it is offered by most online brokers. It is also one of the most popular commodities traded by both small investors and large investment banks. 

The price of crude oil is usually moved because of two main things: demand and supply. The price tends to rise when there is high demand and low supply. Therefore, to be a good oil trader, you need to have information about the two. 

Fortunately, there are vast resources about this. For example, in the United States, the American Petroleum Institute (API) and the Energy Information Administration (EIA) releases US statistics on oil every week. Similarly, OPEC and International Energy Agency (IEA) usually release their demand and supply numbers every month. 

In addition to this information, oil prices usually move because of supply disruptions such as a hurricane at the Gulf of Mexico and wars in the Middle East. 

First, you can use arbitrage, where you trade Brent and West Texas Intermediate (WTI) concurrently. Second, there is a lot of information about crude oil. Third, it is offered by most brokers. Finally, you can also trade ETFs that track crude oil and those that track oil companies. 

Copper

Copper, often known as the barometer of the world economy, is also another popular commodity to trade. It is an industrial metal that is used in the manufacture of electrical items like wires and electric rods. 

Therefore, to trade copper, you need to understand these supply and demand dynamics. In general, the price usually rises when the economy is doing well. Therefore, the price will likely rise when China or the US releases strong economic data. Also, it is affected by supply issues. For example, the price rallied in 2018 when there was a long strike in Chile. 

There are several benefits of trading copper. First, it is offered by most brokers. Second, copper is usually very cheap, meaning that you can trade more of it. Third, copper is relatively volatile, which makes it highly profitable for traders. Finally, there is vast amount of resources on the metal in the internet.

Final thoughts

Commodities are excellent financial instruments that you can use to trade. They tend to be extremely volatile, which helps traders make more money. However, not all commodities are worth your time because of their low volatility and lack of news. As such, if you are just getting started, we recommend that you use the four we have mentioned. Other notable ones are platinum, palladium, and soybeans.


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