Cracking the mood of the market has always been a risky puzzle for traders.
The constant change in the macroeconomic conditions and factors affecting the instruments of demand and supply has added to what we commonly refer to as the ‘volatility’ of the market.
Nevertheless, the uncertain direction of prices is what makes the market interesting.
The commodity market is perhaps one of the most volatile segments in trade. It employs a speculative strategy wherein people trade on the price fluctuation of a commodity.
It is usually divided into two categories, hard commodities, including metals, oil and rubber, whereas soft commodities include agriproducts like coffee, cotton and sugar.
One major factor that gives it an edge over equity markets is the time band commodity trade offers. Not everyone is free to try their luck in the market.
Commodity trade offers a much larger time frame for trading. Besides, it is also an effective means of hedge against inflation.
The future contracts involved in this segment allow an individual to lock an order before it is actually traded in the physical world. By calculating and predicting appropriate fundamental factors, affecting the price of commodities one can make quick and convenient gains in the market.
Commodity trading can be fastened and made nimble by employing contracts for differences. CFDs involve trading on the price differences of financial assets between the contract’s opening and closing time.
Additionally, they also help in providing leverage with ease in the execution of orders. Moreover, since the correlation between commodities and equities and other asset classes is low, they can offer great diversification alternatives.
Commodity prices frequently rise as demand rises. Depending on the market, this form of the portfolio can assist you in earning significant returns than you might have received from equity or capital market.
Commodities are "real assets" and not market instruments like securities. They often respond to shifting economic fundamentals differently.
It is one of the few asset types that typically gain from increasing inflation. As per the elasticity of demand, prices of products and services, as well as the commodities required to generate them, often grow along with the rising demand for goods and services.
Investments in commodities can offer portfolios a buffer against inflation because commodity prices often increase when inflation picks up speed.
Metals, especially gold can act as a strong financial asset during economic slowdowns. Gold has a higher chance of holding its value over time when compared with stocks and currencies because of its monetary nature.
Stocks and currencies are subject to events like war, political conflicts, and stagnation. These qualities make gold a popular choice among traders seeking long-term investments.
Fundamental analyses are the very basis of commodity trade. With a keen understanding and a strong grasp of the market, one can make profitable gains in this segment.
Nevertheless, it is crucial to remain well-informed about the geopolitical landscape and the factors affecting the demand and supply instruments of that particular commodity in which you wish to invest.
(The author of this article is Chief Strategy & Trading Officer at Vantage)
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.