Commodity Trading: What You Need to Know

Online traders have numerous CFD instruments to choose from nowadays – shares, currency pairs, indices, ETFs, cryptocurrencies and – last but far from being the least – commodities. In fact, commodity trading is very easy to understand. Some people may struggle to grasp how you can trade the Euro against the Dollar or what is the VIX all about, but who doesn’t know what gold or crude oil are? Furthermore, even if you are unfamiliar with the less-known currencies such as the New Zealand dollar or shares like Gazprom, just about everyone can relate to commodities such as silver, sugar and coffee.

Commodities are essential goods that we engage with in our day to day lives. Most of us eat sugar, fill our cars up with gas and like to buy (or at least admire) expensive jewelry.

Of course, when you invest in commodities online, you don’t actually buy them. Instead, you trade them in the form of CFDs. If you don’t know what a CFD (Contract for Difference) is, check out our full ‘What is CFD’ article. Oh, you already know? Great, let’s carry on.

The prices of commodities fluctuate in accordance with several factors but most fall into the category of supply and demand. One common factor is weather. For example, if a massive hurricane comes roaring through Iowa destroying hundreds of miles of corn fields, it could reduce the world supply of corn. And if supply is reduced, the demand will often rise. And if demand rises, usually the price does too.
Many traders carefully monitor the weather and attempt to assess potential impact. Online traders can always choose to short or long their position, so for them even news regarding a storm or a drought can be seen as an opportunity.

A more recent example of this type of phenomenon happened back in 2014 when a drought in Brazil’s Espirito Santoregion cut the coffee supply forcing prices to rise.

An earthquake can shut down mines extracting commodities like gold, silver and platinum. For example, when an earthquake trapped the Chilean miners in their copper mines back in 2011, copper futures became volatile. Interestingly enough, political events can also affect the cost of commodities, particularly oil and gas. That’s why when former US president George Bush invaded Iraq back in 2003, oil prices experienced major volatility.
Economic events can also have an impact. For example, if the US Bureau of Statistics releases a lousy jobs report, the USD could decrease, potentially impacting the price of commodities like gold that are viewed by some investors as safe havens.

At iFOREX, you have the opportunity to invest in a wide variety of commodities in the form of CFDs. want to learn more about the types of commodities and how to invest in them? Check out our commodity trading article.

 

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