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"The most valuable commodity I know of is information." — Gordon Gekko
Investing in commodities can be a way for investors to diversify their portfolios and potentially hedge against inflation.
Commodities are essential for various industries, from production and construction to energy and agriculture. As such, they are among the most commonly traded assets, and changes in their values have a powerful impact on the global economy and financial markets.
What precisely are these goods??
Commodities are raw materials or primary products that are traded in global markets. Depending on their physical characteristics, they are typically categorized as either hard commodities or soft commodities.
Hard Commodities - typically extracted from the Earth.
Energy: crude oil, natural gas, gasoline, diesel, coal;
Metals: gold, silver, copper, aluminium, iron ore, steel;
Grains and oilseeds: corn, wheat, soybeans, rice, cotton, cocoa, coffee;
Soft Commodities - typically grown or produced through agricultural processes.
Agricultural Products: dairy products, eggs, orange juice, cotton, wool;
Livestock and Meat: cattle, hogs, pork bellies, beef, pork, chickens;
Forest Products: lumber, pulp, paper;
The most traded commodities in the world are:
Crude oil: Crude oil is the most actively traded commodity in the world, with daily trading volumes in millions of barrels. Oil is a crucial input in transportation, manufacturing, and energy production, and its price is closely watched as an indicator of global economic activity.
Gold: Gold is one of the most widely traded precious metals, with trading volumes driven by both: investment demand and industrial use. Gold is often seen as a safe-haven asset and a hedge against inflation, making it popular during economic uncertainty.
Copper: Copper is an essential industrial metal used in a wide range of applications, including construction, electronics, and transportation. Copper prices are often seen as a leading indicator of economic activity, as demand for the metal tends to rise during periods of economic growth.
Soybeans: Soybeans are one of the most widely traded agricultural commodities, used primarily in producing animal feed, cooking oil, and biofuel. Various factors influence soybean prices, weather conditions, crop yields, and global demand.
Corn: Corn is another major agricultural commodity used in a wide range of food and industrial product. Corn prices are influenced by weather conditions, crop yields, and government policies related to biofuels.
Countries with the most commodities
No country can claim to have the most commodities because they are found and produced in many different regions worldwide. However, some countries are known for their abundance of certain commodities due to their natural resources and geography.
As an example should be mentioned:
Canada — rich in natural resources, including oil, natural gas, gold, copper, nickel, and lumber.
Brazil — a major producer of several commodities, including soybeans, coffee, sugar, orange juice, and iron ore.
Saudi Arabia — one of the world's largest oil producers and exporters, with significant crude oil and natural gas reserves.
Australia — a major producer of many commodities, including coal, iron ore, gold, aluminium, and natural gas.
Democratic Republic of the Congo — one of the world's largest producers of copper and cobalt and significant amounts of gold and diamonds.
Key Players of the Global Commodity Traders Market
The global commodity traders market includes a range of key players from various industries involved in the production, trade, distribution and marketing of commodities.
Some of the major players in the global commodity traders market include:
Glencore is one of the world's largest globally diversified natural resource companies. The company produces and markets a range of commodities, including metals, minerals, and energy products.
Rio Tinto Group is an Anglo-Australian multinational company focusing on finding, mining and processing the Earth's mineral resources.
Mercuria Energy Group Ltd is a multinational commodity trading company active in a broad spectrum of global energy markets, crude oil, refined oil products, petrochemicals, natural gas, LNG, power, dry bulk, carbon emissions, freight, base metals and soft commodities.
Cargill is a multinational corporation involved in producing and trading agricultural commodities, including grains, oilseeds, and animal feed.
The Archer-Daniels-Midland Company, commonly known as ADM, is an American multinational food processing and commodities trading corporation founded in 1902. They produce ingredients and flavours for food and beverages, supplements, animal feed, and more.
Louis Dreyfus Company B.V., also called the Louis-Dreyfus Group, is a French merchant firm involved in agriculture, food processing, international shipping, and finance.
The commodities industry includes a diverse range of companies, from large multinational corporations operating across the entire commodity value chain to small and mid-sized companies focusing on specific commodities or regions. The industry also includes financial institutions, such as commodity trading firms and investment banks, that provide financing and risk management services to companies involved in producing and trading commodities.
The commodity market
The commodity market is a financial market where raw materials or primary products are traded. It is also a complex and dynamic sector that plays a critical role in the global economy. As with any industry, it faces many challenges and opportunities as it adapts to changing market conditions, technology advancements, and regulatory environments.
Let's evaluate what difficulties we could face in this industry.
Advantage and Disadvantages
The commodities industry is subject to vary during a recession or market downturns and uncertainties, including fluctuating commodity prices, geopolitical risks, and supply chain disruptions. These risks can have significant impacts on companies that operate in the industry, as well as on economies that rely heavily on commodity exports.
Advantages | Disadvantages |
Diversification: Commodities allow investors to diversify their portfolios beyond stocks and bonds, potentially reducing their overall risk. | Volatility: Commodity prices can be volatile and subject to sudden shifts due to geopolitical events, supply and demand factors, etc. This can make it difficult for investors to predict future price movements and can lead to significant losses. |
Inflation hedge: Commodities have historically provided a hedge against inflation because their prices tend to rise along with inflation. This can help protect investors' purchasing power and maintain the value of their portfolio during times of inflation. | Lack of income: Unlike stocks or bonds, commodities do not generate income, so investors must rely solely on price appreciation for returns. This means that investors may need to hold the asset for a more extended time to see significant gains. |
Global demand: Commodities are often in high demand globally, particularly in developing countries, which can provide opportunities for investors to profit from growth in emerging markets. | Lack of control: Unlike other types of investments, such as real estate, investors in commodities have little control over the underlying asset and cannot influence its value. This means that they rely on market forces to determine the commodity's price. |
Portfolio optimization: Adding commodities to a portfolio can help optimize the overall risk and return profile. Commodities tend to have low correlations with other asset classes, which means they may perform differently than stocks and bonds in different market conditions, potentially reducing overall portfolio risk. | Speculative nature: Some investors may be drawn to commodities for their potential to generate high returns, but investing in commodities is often speculative and can result in significant losses. Commodities can be subject to bubbles and price speculation, leading to sudden and sharp price declines. |
Tangible assets: Unlike stocks and bonds, commodities are tangible assets, which means investors can physically own and store them. This may appeal to some investors who prefer investing in assets they can see and touch. | Storage and transportation costs: Some commodities, such as precious metals, require storage and transportation, which can add to the cost of owning the asset. This can also add to the complexity of investing in commodities. |
Potential for high returns: Some commodities, such as precious metals, have the potential to generate high returns over the long term, particularly during times of economic uncertainty. For example, during a recession or market downturn, investors may turn to gold as a safe-haven asset, driving up its price. | Limited market access: Some commodities may be difficult to access for retail investors, as they require specialized knowledge and access to specific markets. This can make it difficult for investors to diversify their portfolios with commodities. |
It's also worth considering limited market access. Retail investors may find some commodities challenging to access, as they require specialized knowledge and access to specific markets. This can make it difficult for investors to diversify their portfolios with commodities.
What moves commodity prices?
A range of factors, including supply and demand dynamics, geopolitical events, weather patterns, currency fluctuations, and government policies, can influence commodity prices.
Let's review some of the critical aspects impacting this sector.
Supply and demand — their imbalances are key drivers of commodity prices. If there is excess supply or weak demand for a commodity, prices are likely to decline. Conversely, prices are likely to increase if there is a limited supply or strong need for a commodity.
Geopolitical Events — such as wars, political instability, and trade disputes, can disrupt global commodity supply chains and impact prices. For example, sanctions on a major oil producer or a disruption to shipping lanes can lead to supply shortages and higher prices.
Weather Patterns — such as droughts, floods, and hurricanes, can impact crop yields and supply levels for agricultural commodities. Severe weather can also affect energy production and distribution, leading to supply disruptions and higher prices.
Currency Fluctuations — Changes in exchange rates can impact commodity prices by making them more or less expensive for buyers in different regions. A strengthening U.S. dollar, for example, can make commodities priced in dollars more expensive for buyers in other currencies.
Government Policies — such as subsidies, tariffs, and regulations, can impact commodity prices. For example, a government subsidy for corn production can increase supply and lower prices, while a tariff on steel imports can reduce supply and increase costs.
How to invest in commodities
There are several ways to invest in commodities, each with advantages and disadvantages. Here are some of the most common methods:
Physical ownership: Investors can purchase and physically own commodities, such as gold or silver bullion, through dealers or brokers. This allows investors to hold the item as a tangible asset, but it also comes with storage and security costs.
Futures contracts: Investors can buy and sell futures contracts on commodity exchanges, such as the Chicago Mercantile Exchange (CME) or New York Mercantile Exchange (NYMEX). Futures contracts allow investors to bet on the future price of a commodity and can be used for hedging or speculative purposes.
Exchange-traded funds (ETFs): ETFs allow investors to buy shares in a fund that tracks the price of a particular commodity or a basket of commodities. This provides exposure to items without physical ownership but also comes with management fees and the risk of tracking errors.
Mutual funds: Allow investors to gain exposure to commodities but through a diversified portfolio of commodity-related stocks and bonds. This provides exposure to commodities without direct ownership or futures contracts.
Commodity-based equities: Investors can also invest in companies producing or distributing commodities like mining or oil. This provides indirect exposure to the commodity and comes with the risks associated with investing in equities.
When investing in commodities, it's important to consider your investment goals, risk tolerance, and investment strategy. Commodities can be volatile and come with risks, including a lack of control over underlying assets and speculative nature. Therefore, it's important to carefully research and understand the market and underlying factors that can impact commodity prices. Diversifying your investments across different asset classes to minimize risk is also a good idea. |