Commodity: A Guide for New Investors to Profit from Commodities

The commodity market is increasingly attracting new investors, whether it’s gold, oil, or coffee beans. But before diving into the world of Commodity trading, it’s better to understand it first.

Commodity: Products that turn nature into money

Commodity is not just a product but a high-value raw material that forms the basis of daily production and consumption, such as copper, crude oil, wheat, coffee beans, gold, and other natural goods.

If we categorize commodities based on their natural origin, there are two main groups:

• Soft Commodities: Agricultural products with limited shelf life, subject to weather fluctuations, such as coffee, cocoa, oranges, and sugar.
• Hard Commodities: Extracted products from natural resources that are finite, such as oil, natural gas, silver, copper, and gold.

Types of commodities favored by traders

Agricultural sector: Coffee (COFFEE), Sugar (SUGAR), Wheat, Cotton

Livestock and meat sector: Pork, beef, and other products

Energy sector: Brent crude oil (UKOIL), WTI crude oil (USOIL), Natural gas (NATGAS)

Precious metals: Gold (XAUUSD), Silver (XAGUSD), Platinum (XPTUSD), Palladium (XPDUSD)

What is the driving force behind commodity prices?

Commodity prices do not fluctuate randomly; there are four main factors to watch:

1. Demand Factors (Demand Factors) Increased income and population pressure push prices up. Low-income countries often spend most of their income on food, so consumption behavior, spending, and demographic age all influence commodity prices.

2. Supply Factors (Supply Factors) Production factors such as labor, capital, land, water sources, natural resources, production efficiency, and management all generate supply. Improving efficiency requires R&D, but since the 2008 crisis, investment in production has gradually diminished.

3. Natural Uncertainties (Uncertainties) Extreme weather due to global warming, natural disasters, and impacts on crop yields and livestock all cause price volatility.

4. Investment and Speculation Cycles (Feedback Loops) When prices rise, speculators enter; when prices fall, they exit. This creates imbalances between supply and demand, which are the true drivers of price movements.

Trading commodities: why is it attractive and what are the risks?

Advantages to know

Hedge against currency depreciation Gold, silver, and oil act as hedges against inflation. When living costs rise, these commodities’ prices tend to increase.

Diversify your portfolio risk Commodities often have low correlation with stocks and bonds, reducing overall portfolio volatility.

High liquidity Can be traded anytime during market hours without waiting.

High profits during market instability Imbalances in supply and demand, natural disasters, or unforeseen events can cause sharp price increases.

Long-term growth opportunities Demand for commodities continues to surge, while resources diminish, leading to potential long-term price increases.

Risks to consider seriously

Leverage: Good for amplifying gains, but can lead to losses Commodity traders often use more leverage than stock traders. High leverage = high risk. Self-control becomes harder, and you might lose all your money without realizing.

Excessive volatility Commodities are twice as volatile as stocks and four times as volatile as bonds. Some, like crude oil and gold, are even more volatile, with rapid price surges and drops, making decision-making difficult.

Opposite to equity markets Generally, commodity profits tend to be inversely correlated with stock markets.

Environmental impact Some commodities are linked to environmental issues, such as deforestation for mining or oil spills in the sea.

4 ways to trade commodities for beginners

Method 1: ETF Commodity - Safe and convenient

What is it? Buying ETF units instead of physical goods. Most ETF commodities invest in futures or derivatives.

Advantages:

• Low investment threshold; you can buy 1 unit instead of a whole bar of gold.
• Highly liquid; can be traded online throughout market hours.
• No worries about storage, theft, or high costs.

Method 2: Futures Commodity - Risk and opportunity combined

What is it? A forward contract agreeing on a price today for delivery in the future.

Advantages:

• Can profit from both rising and falling markets, as commodity prices fluctuate in both directions.
• Low cost; only margin (Margin) is required instead of full payment.
• Suitable for traders with limited capital.

Method 3: Commodity company stocks - Invest in the parent

What is it? Stocks of companies that produce or trade raw materials, such as BHP Group Ltd., Rio Tinto Group, Vale SA, Wheaton Precious Metals Corp., Barrick.

Advantages:

• Diversification; profits come from management and operations, not just commodity prices.
• Hedge against inflation; as commodity prices rise, related companies’ profits increase.

Method 4: CFD Commodity - Flexible and 24/5 trading

What is it? Online trading via brokers without physical delivery. Positions follow commodity prices.

Advantages:

• Profits in both directions; buy when prices go up, sell when they go down, without holding the asset.
• Hold positions for months or years by paying overnight interest (Swap) instead of costly rollover futures.
• Open 24 hours, 5 days a week; trade anywhere, anytime.
• Wide market options, not just commodities but also stocks, indices, and other instruments.

Hidden costs often overlooked

When trading CFD commodities, investors should remember that profit = opening price - closing price - transaction costs.

3 main expenses:

1. Spread: The difference between bid and ask prices. Example: Gold bid 1949.02, ask 1949.47, spread = 0.45. To profit, price movement must exceed this spread.

2. Swap: Fee for holding a position overnight, charged at 23:59.

3. Commission: Trading opening and closing fees (on some instruments).

Investors should carefully calculate these costs before trading.

Commodity trading schedule

Not all commodities are open 24 hours; check with your broker. Examples of popular commodities (Thailand time):

(Market closed on weekends)

Trading commodities: balancing numbers and allure

Commodities are a diverse investment mechanism with high profit potential but also significant risks. For beginners starting out, it’s recommended to choose brokers that:

• Offer a wide range of commodities to trade
• Provide fast deposit and withdrawal services
• Have low commissions and spreads

Most importantly: do not make commodities your main portfolio. Due to high volatility, diversification is essential. Learn about the risks and understand the numbers and market factors driving each commodity’s price deeply before making investment decisions.