All About Trading Commodities
Trading commodities is different than other financial vehicles and the forex trader needs to be aware of these differences prior to involving themselves within this market. When trading commodities you can run into situations where there are required agreements/standards to trades which can be executed without relying on visual standards. For example, the trader does not want to purchase one hundred units of cattle to realize that the cattle are actually sick. In addition, the trader does not want to discover that the sugar which was purchased is inferior to what they expected. Once again, trading commodities can be very lucrative, however, the trading of this product is not nearly the same as trading stocks or bonds.
There are numerous forms of commodities including; agricultural (sugar, cotton, coffee, cocoa, rice, wheat, soybeans and corn), livestock and meats (feeder cattle, live cattle, pork bellies and lean hogs), metals (copper, platinum, silver and gold). There are varying differences between the commodities markets and the stock and bond markets. Global growth and economic demand, technological growth and market demand for the various commodities influence items such as corn, sugar, copper, aluminum and oil. An example of this would be the growth in China and India which has contributed to the decline of availability in commodities throughout the world.
Typically, economic principles are attached to the commodities markets. The lower supply of a particular commodity equals a higher price. For example, investors can track patterns in livestock as well as statistics. When there are disruptions in supply from events such as widespread health scares as well as diseases, this can lead to commodity trading strategies or investing opportunities because of the long term demand for a product like livestock is stable and predictable.
Commodity strategies can be centered on any commodity trading product. Gold is a well-known commodity which does have a strong presence in the markets when the securities markets go south. When the markets become volatile or uncertain you will have a disproportionate number of investors scrambling to invest and transfer capital to precious metals like gold which has been regarded as reliable. Precious metals are also utilized to hedge against inflation.
Another commodity with is tracked quite frequently is crude oil. Crude oil is tracked on a consistent basis by consumers, financial markets, corporations and countries. When it comes to the airlines industry commodity trading strategies are paramount. The airline industry can be deemed as cyclical in nature as well as sensitive to various key drivers particularly the price of crude oil. It has been establish that the movements in oil prices can have a major impact on the livelihood of organizations in the airline sector. Fuel costs are a major component in the operating expense of airlines. Trends show that the lower the cost of fuel the higher the stock price of airlines. Because of the sensitivity between costs associated to fuel and the performance of airlines it is the airlines which are consistently watching prices in fuel. Hedging strategies are used quite frequently by the airline organizations as a way to protect profits and deal with potential rising fuel prices. Hedging within the airlines industry is more prevalent with low cost providers then the bigger carriers.
In closing, the commodities markets are vast with numerous commodities products to trade in. There are many organizations within various industries which hedge commodities. Industries such as cattle ranchers, food companies, hospitals, airlines, energy companies & IT companies are all examples which will hedge commodities prices. In addition, the standards associated to commodities trading is different than that of the equity or bond market. The forex trader should recognize these differences prior to trading the commodities markets.
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