Why trade commodities?
Commodities are an integral part of our daily lives. In the physical commodities market, there will be an actual exchange of goods however most traders do not actually take or require the physical commodity. They speculate and take on long (buy) or short (sell) positions to profit from the price movements.
There are many reasons to be trading commodities, among them is the ability to hedge against inflation and diversification.
Diversification
Trading in commodities creates portfolio diversification, as the commodity market prices move independent of other assets. Gold, one of the most popular instrument, is often considered as a safe haven, especially in troubled times.
The safe-haven investment, gold, has historically reacted negatively to increases in the dollar and bond yields. During times of economic turmoil, gold appeals as a safe haven investment, while demand for metals and energy falls, and vice versa.
For example, in 2020, when the global equities market, currencies, and bond markets were under pressure due to the global outbreak of COVID-19, demand for energy and metals was also down, resulting in a drop in prices to multi-year lows, while gold—a safe-haven metal—soared to an all-time high. Crude oil prices even fell into the negative territory for the first time in commodities trading history.
Hedging against Inflation
Trading commodities can protect investors from inflation, as inflation hurts ordinary investment products. In times of inflation, returns on ordinary investment products such as bonds are relatively low.
This is because when the prices of goods and services rise, the value of the commodities needed to produce these goods and services will also rise. So if your portfolio includes certain commodities, you may be able to reduce losses owing to inflation.
Commodities trading with CFDs
Rather than holding the physical asset of gold, CFDs allow traders to speculate on the way the price of a commodity will change, without ever owning the commodity in question.
Traders who expect an upward movement in price will buy the CFD, while those who see the opposite downward movement will open a sell or ‘short’ position.
Example. If you opened a long (buy) CFD trade on gold when gold was priced at 1,500, and you closed the trade after the price of gold rose to 1600, you would make a profit on the difference in the gold price, or 100. If the price fell to 1400, you would make a loss of 100.
What makes trading commodities with CFDs truly viable is availability and leverage.
Availability
Commodities are traded globally and traders can trade 24 hours a day, five days a week, accessing opportunities from a range of commodities and exchanges all around the world.
Leverage
Before the days that leverage was introduced into the markets, traders must come up with 100% of the value of the trade to open a position. With the introduction of leverage, traders are only required to come up with a fraction of the actual capital to open a position, this deposit is called margin. (margin usually ranges from 1% to 10%)
Leverage enables a small fluctuation in the price of a CFD to be magnified into a larger change in profit and loss, with the degree of profit and loss depending on the degree of leverage used.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.