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, while the performance of commodities is generally in direct proportion to inflation. 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.
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If you wish to trade commodities, gold and crude oil will probably be your first choices to start because gold is an important hedging tool in the market. When the world encounters political instability or economic downturns, people will worry about currency depreciation, and gold will often become one of the options against currency depreciation.
When an international emergency breaks out, the price of gold will experience large fluctuations. Unlike currency pairs, the price of gold is affected not only by the countries involved, but also by global factors. Therefore, gold provides investors with more investment opportunities.
With regards to crude oil, investors would easily understand the reasons for fluctuations in its supply and demand by reading international news. Like gold, oil prices are affected by global factors, which provides more opportunities for investors.
Supply and demand are important factors that affect commodities. Taking oil as an example, if the supply of oil is expected to be strong, and market demand for it does not change much, then the oil price will fall. Often, tensions in the Middle East affect the stability of the oil supply, resulting in a shortage of supply in the market, and pushing oil prices higher due to expectations for demand surpassing supply in the short term.
Another important factor is inflation. When inflation rises, investors need more money in exchange for goods due to currency depreciation, which will also affect the price of commodities.
Commodities refer to raw materials that are extensively used in industry or agriculture, and are purchased and sold on a wholesale rather than retail basis. Commodities are generally classified into three categories:
1. Energy – including crude oil, natural gas, etc.
2. Basic raw materials – including gold, silver, copper, aluminum, etc.
3. Agricultural products – including sugar, corn, soybeans, etc.
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