Top 4 Commodities for Day Traders

Apr 16, 2021 07:54 PM ET
Top 4 Commodities for Day Traders

Commodities are an integral part of the financial market. Furthermore, to a large extent, they are the backbone of most parts of the market. For example, commodities like crude oil support entire economies and have an impact on stocks, currencies, and some exchange-traded funds. In this article, let us look at some of the top four commodities for day traders.

Crude oil

Crude oil is the most influential commodity in the world. It helps to power the global trade by powering ships and aircraft. It also powers local trade and other industries like manufacturing and agriculture. Every day, more than 100 million barrels of crude oil are traded globally. With oil trading at $62, the total traded oil is worth more than $6.2 billion. This makes oil one of the most liquid assets in the market.

Broadly, there are many benchmarks of crude oil but the ones that matter are West Texas Intermediate (WRI) and Brent. WTI is the American benchmark, while Brent is the global one. The Dubai and Canadian benchmarks are not popular with traders.

There are several reasons why many day traders opt for crude oil. First, oil is one of the most volatile commodities in the market. This presents more trading opportunities to day traders. 

Second, there is a lot of news on oil almost every day. For example, every Tuesday and Wednesday, the American Petroleum Institute (API) and the Energy Information Administration (EIA) publish their inventory numbers. At times, these can move the market substantially. Similarly, every month, there are reports by the EIA, OPEC, and the International Energy Agency (IEA). 

Third, the crude oil price is also affected by geopolitical issues. For example, any geopolitical issues between Western countries and the Middle East lead to more volatility in the price of oil.

Gold

Gold is an important metal that does not have any major industrial purpose globally. Unlike other commodities, gold is not used to manufacture any important thing. Instead, most of the mined gold is bought by investors like hedge funds and central banks like the Federal Reserve.

Gold is therefore not viewed as other commodities. Indeed, while the price of other commodities moves because of demand and supply, such dynamics never apply to the gold prices.

Instead, the gold price typically moves because of the overall policy frameworks of the Federal Reserve. That’s because, in most cases, gold is often viewed as the opposite of the US dollar. When the gold price rises, the dollar tends to fall, and vice versa.

Therefore, in most periods, when the Federal Reserve is generally dovish, gold prices tend to rise as the dollar weakens. For example, in 2020, the gold prices rose to an all-time high of $2,000 after the Federal Reserve slashed interest rates and launched a major quantitative easing program. Similarly, the gold prices tend to fall when the Fed turns hawkish since it usually leads to a stronger dollar. The chart below shows the overall relationship between gold prices and the US dollar index.

Gold prices vs. dollar index

Gold prices vs. dollar index

Copper

Like gold and crude oil, copper is one of the most liquid commodities in the market. It is also widely popular among day traders.

For starters, copper is a metal used in the manufacture of electrical components. It is used in these items because of its strong conduction characteristics and the fact that it is relatively ductile. Therefore, indirectly, billions of people use copper products every day. This makes it a barometer of the overall global economy.

Most copper is mined in countries like Chile, Peru, and the Democratic Republic of Congo (DRC), while China is the biggest buyer. The biggest companies in the industry are Glencore, BHP, Codelco, Freeport McMoran, and Antofagasta, among others. 

Copper tends to be highly volatile, especially in periods of global trade tensions. If there are tensions between Western countries and China, it usually leads to lower copper prices. For one, this leads to worries of less trade and demand for the metal.

As a barometer for the world economy, copper prices typically rise when the global economy is doing well. In this period, the demand for the metal is higher, and the US dollar is a bit weak. It also rises when there are expectations that the global economy will recover as it did in 2020 amid the global pandemic. Another reason why most traders focus on copper is that it is offered by most online brokers.

Copper vs. dollar index

Copper vs. dollar index

Silver

Silver is another metal that is popular among day traders. Unlike the other three commodities, silver has a unique characteristic in that it is both an industrial and precious metal. Most silver that is mined every year is bought by companies that manufacture solar panels, mirrors, coins, and bars. Others are bought by investors, who focus on the metal because of its store of value qualities. 

Silver has been around for centuries. It is mentioned in ancient books, including the bible, several times. The metal is closely associated with gold. Indeed, it is often known as a gold’s poor cousin. That’s because, while an ounce of gold trades for more than $1,700, silver an ounce of the metal goes for less than $30.

Silver is one of the most volatile metals in the world because of its industrial uses and its close relationship with gold. It typically does well when there are positive economic macro numbers because it means more demand. However, its price is also affected by gold prices. When the gold price rallies, silver tends to rally too. That’s because many people tend to move to silver as a proxy for gold because of how cheaper it is. The opposite is also true.

Silver vs. gold prices

Silver vs. gold prices

Summary

Commodities are an integral part of the financial market. Indeed, there are many day traders that focus fully on commodities like oil and copper. In this article, we have looked at some of the most popular commodities among day traders. Other popular commodities that we have not looked at are platinum, palladium, soybeans, and natural gas.


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