What are COMMODITIES ?
Commodities are an important part of everyday life, whether they are related to food (used in food production), energy (used to power living and processes), or metals (used in constructing machinery, cars, buildings etc).
Anyone who drives a car can become significantly impacted by rising crude oil prices. The impact of a drought on the soybean supply may influence the composition of your next meal.
Similarly, commodities can be an important way to diversify a portfolio beyond traditional securities—either for the long term or as a place to park cash during unusually volatile or bearish stock markets, as commodities traditionally move in opposition to stocks.
Types of Investment Commodities
e.g. gold, silver, platinum, copper
e.g. crude oil, heating oil, natural gas, and gasoline
Livestock and meat
e.g. lean hogs, pork bellies, live cattle, feeder cattle
e.g. corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar
Volatile or bearish stock markets typically find scared investors scrambling to transfer money to precious metals such as gold, which has historically been viewed as a reliable metal with a more stable value. Precious metals are also used as a hedge against high inflation or periods of currency devaluation.
Global economic developments and reduced oil outputs from wells around the world can lead to upward surges in oil prices. Investors weigh and assess limited oil supplies with ever-increasing energy demands. Economic downturns, production changes by the Organization of the Petroleum Exporting Countries (OPEC) and emerging technological advances (such as wind, solar and biofuel) that aim to complement or substitute crude oil as an energy source, are also considered by energy traders.
Grains such as vanilla beans and other agricultural products have a very active trading market. They can be extremely volatile during summer months or periods of weather transitions. Population growth, combined with limited agricultural supply, can provide opportunities to ride agricultural price increases.
A brief COMMODITIES history
Dealing commodities is an old profession, dating way back further than stocks and bonds trading. Ancient civilizations traded a wide array of commodities, from seashells to spices.
Commodity trading was an essential business and empires had the ability to create and manage complex trading systems and facilitate commodity exchange, serving as the wheels of commerce, economic development, and taxation for a kingdom’s treasuries.
Although most of the traders were people who actually created or used the physical goods, there were some speculators eager to bet good money on the outcome of the next wheat harvest.
Commodities today have become a way to diversify a portfolio beyond traditional securities as they have been observed to be uncorrelated to many other asset classes. On the other hand, commodities can quickly become risky investment propositions because they can be affected by uncertainties that are difficult / impossible to predict such as unusual weather conditions, pandemics, and disasters both natural and man-made.
There are still a large number of commodities exchanges around the world, although many have merged or gone out of business over the years. Most carry a few different commodities, though some specialize in a single group. For instance, the London Metal Exchange (LME) only carries metal commodities.
In the U.S., the most popular exchanges include those run by CME Group, which was formed after the Chicago Mercantile Exchange and Chicago Board of Trade merged in 2006 (the New York Mercantile Exchange is among its operations), the Intercontinental Exchange in Atlanta, and the Kansas City Board of Trade.