Investment in commodities

There had been concerns over trade war induced slow-down in commodity sector but it is believed the natural resource sector has modified significantly in the last few years and many base metals were weak in the quarter where copper, aluminum, zinc and nickel were down in range 3 - 15 per cent.  Gold fell below $1200 an ounce in the third quarter, and this was, mainly, due to the change in US trade policies, trade war and dollar gains.  Rising US dollar and tariffs on China led to change in base metal price as China is the main customer of 50 per cent of the global base metals demand.  Some commodities still appear attractive due to undervaluation or under representation as compared to broader market. Commodity markets have been negatively affected by plunge in capital investment in natural resources in the last few months.

Categories

The commodity markets involve unprocessed or raw material, which can be sold or bought or used for everyday consumption. These are interchangeable items. Some of the categories are energy (oil, gas), grains, livestock and meat, metals etc. There are some soft commodities such as cocoa, sugar, orange juice and others such as wood. Both hedgers and speculators are key participants of the commodity markets where the hedgers may be the one who actually produces processes and ships the commodities such as oil and gas. Speculators are the banks, funds or individual investors, which trade in such items and the price can go up or down, within a duration depending on a number of factors, mainly, to gain profits.

Traders also trade in futures contracts and exchanges where there exists a standard agreement between the buyers and sellers - both the parties agree to sell a commodity on a predefined rate in future.

History

Commodity futures were started in 1848 at CBOT, which was based on the bushel of corn.   Future exchanges like stocks provide centralized forum for speculators and hedgers – where he buyers can get sellers and vice versa.

Factors influencing commodity trade

A number of factors influence  the commodity markets such as environmental factors, fuel demand, cold weather, farmer harvests , hurricanes, heat waves , production , shipping, economic changes and political factors. Global trade issues, wars and geopolitical factors can influence it.

On can invest in future contract which provides a guarantee to sell or buy at a prospective price. If the price of future rises, the buyer can profit, whereas, the seller profits if the price reduces.

In future trade, the delivery of commodity does not happen in most conditions and most contracts close before expiration.

One can opt for call option in future where the contract gives the holder a right to the commodity but there is no obligation to buy or sell at the price before expiration.  

ETFs can be bought and sold at markets and these are linked to a single commodity or many. Some publicly traded companies provide direct or indirect exposure in such sectors.

To find out more about commodity investment, check Asset Class Pedia at (https://assetclasspedia.com/).