How & why you should Trade Commodities CFD's

Chump says, trade it, don't own it, unless you have a very big warehouse and unlimited funds. Trading the price movement is the most popular way for retail traders.

A contract for differences (CFD) is a financial contract that pays the differences in the settlement price between the open and closing trades. CFDs essentially allow investors to trade the direction of securities over the very short-term and are especially popular in FX and commodities products. The most heavily traded assets in CFD trading is crude oil and gold.

The prices move rapidly, not just because of technical supply and demand but also because of fundamentals, therefore, news , and these days news travels fast and an astute trader can take instant advantage and therefore profits, be it buy or sell the price movement. Why?

Commodities are tangible assets which can be bought or sold; however, buying and selling these products in large quantities present logistical challenges for traders and investors.

Therefore, traders looking to speculate on the price of any of the most traded commodities on our list can do so using financial instruments, such as Contracts for Difference (CFDs). Commodity CFDs allow traders to attempt to profit from both rising and falling prices without ever taking, or delivering, ownership of the underlying commodity.


What Are Commodities?

Commodities can be either raw materials or agricultural products which, although sometimes a good in their own right, are generally used as the “building blocks” for other goods and services. The word commodity, therefore, covers a myriad of different goods, from sugar to crude oil, from cotton to steel.

Commodities of the same type and the same quality tend to be interchangeable, or fungible, with each other and, therefore, hold the same value to consumers. For example, coffee produced in Colombia will have more or less the same value as coffee produced in Kenya, provided they are of the same quality.


So, what are the top ten most traded commodities in the world?

Brent Crude Oil

The first two entries on our list of the most traded commodities in the world should come as little surprise.

Despite moves towards greener energy in recent years, crude oil is still very much in high demand. It powers our cars, heats our homes and produces fertilisers, pesticides and plastic.

Brent Crude is one of two major types of crude oil which act as global benchmarks for the industry, the other being WTI crude. Brent Crude is extracted from the North Sea and is characterised as a light, sweet crude oil.

Light because of its low density and sweet because of its low sulphur content. Both of these qualities result in Brent Crude being relatively easy to refine.


WTI Crude Oil

West Texas Intermediate (WTI) crude acts as another benchmark for global oil prices and is also one of the most widely traded commodities in the world.

It is drilled in various states throughout the US and is also described as both sweet and light, having even lower sulphur content and density than Brent Crude.

The prices of both WTI and Brent Crude historically have positive correlations with global economic growth. When the economy is growing, demand for oil inevitably increases which drives up its price.

Graphic example of how events shape the price of oil and the volatility.

Natural Gas

Natural gas is another important source of global energy, which is found deep below the surface of the earth. Although a non-renewable energy source, natural gas is the cleanest burning fossil fuel and is very versatile, meeting a lot of the same needs as crude oil.

As the world cuts emissions in an attempt to reach net zero by 2050, the use of both crude oil and natural gas will inevitably need to be curtailed. However, due to producing less emissions than oil, it is expected that natural gas will continue to be a major source of global energy during the transition.


Gold

A precious metal which has been sought after for centuries, gold is now primarily used for jewellery production and as a vehicle for investment and is primarily mined in China, Australia, Russia and the US.

Gold is one of the most traded commodities in the world but, in times of uncertainty, it often becomes even more popular with investors. This is because it is considered a safe haven asset, meaning that it tends to retain value or even rise in price during times of economic and political upheaval.

The weekly chart shows the volatility and price movement of Gold futures

Silver

Another precious metal, silver has also been historically sought after by mankind for many centuries. Unlike gold, around half of silver’s demand arises from its industrial uses, such as in solar panels and electrical products.

However, like gold, a lot of its demand is controlled by jewellers and investment. Whilst silver is also considered a safe haven asset, it is not seen to be as reliable as gold due to the fact that gold's value is less dependent on industry.


Copper

Copper is a very important metal in the modern world. Due to its characteristics of being an excellent conductor of electricity and heat, it is widely used in the electronics and building industries.

Chile is an important producer, accounting for almost a third of total global production in 2020. Peru, China and the US, to name a few, are also important, though smaller, producers.

Due to its use in manufacturing, the price of copper is highly dependent on economic output and, consequently, demand for the base metal is seen as a reliable indicator of economic health – earning it the nickname “Dr Copper”


Coffee

With an estimated 2.25 billion cups drank a day across the globe, it should come as little surprise that coffee is one of the most traded commodities in the world. Coffee beans are grown in more than 50 countries, in what is known as the “coffee belt”, with its largest producer being Brazil.

There are two main varieties which account for the vast majority of coffee production: arabica and robusta. Arabica is generally considered to be higher quality, making it more popular, accounting for around 60% of total coffee consumption.

When it comes to trading, arabica tends to have more stable pricing, while the price of robusta is generally more volatile.


Cocoa

The next of the most traded commodities on our list, cocoa is used to produce one of the world’s favourite products, chocolate!

Production of cocoa is mainly concentrated in West Africa and Latin America, with West Africa accounting for 70% of global production. The vast majority of commodities are traded in US dollars, however, cocoa is one of the last remaining which is still typically traded in British pounds.


Cotton

The majority of people reading this article will most likely be currently wearing at least one item of clothing made using the final item on our list of the most traded commodities in the world.

But besides clothing and household items, cottonseed is also used as feed for livestock, it is made into oil which is subsequently used in the manufacturing of soap, margarine, rubber and plastics. Linters, which are fibres found on cottonseed are also used to make bandages and bank notes. India, China and the US are the largest three producers of cotton in the world.


Why we trade commodities.

Commodity traders undertake fundamental analysis and technical analysis to forecast market movements. They aim to buy when the price is low, which is usually determined by an abundance of supply and falling demand. They sell when they believe the supply is outweighed by the demand, which can result in a profit.

Commodities prices are driven by the forces of supply and demand. Huge price swings can occur when scarcity or abundance of a commodity suddenly looks likely. These can be triggered by regular events, such as seasonal demand, or less predictable factors, such as a bad harvest, or developments in a particular industrial sector, a national or regional economy, or even global events.

However, unlike some other types of market, these factors can often be easy to see, understand and at times predict. This can help make commodities attractive for anyone with an understanding of the factors that will influence the price of a particular commodity.


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