A Guide on How to Invest in Commodities Successfully – Introduction
Commodities are the lifeline of the global economy. All countries depend on these commodities in various ways. What makes them important or unique is that countries are endowed differently. For example, Saudi Arabia has a lot of crude oil and no corn or precious metals. United States has a lot of corn and soybeans and no tea and coffee while South Africa has a lot of minerals and no crude oil. This issue leads to an increase in demand and supply dynamics. This is because countries always move to import and export the commodities.
There are two main groups of commodities. These are hard and soft commodities. The hard commodities are then divided into energy and metals while the soft commodities are divided into livestock and agriculture. The metals are then subdivided into industrial and precious metals. The industrial metals are aluminum, zinc, tin, copper, nickel, and titanium among others. The precious metals are gold, platinum, palladium, silver, and Iridium.
Energy commodities are crude oil, heating oil, natural gas, and unleaded gasoline while livestock commodities are lean hogs, pork bellies, and feeder cattle. Agricultural commodities are then divided into softs and coarse grains. The softs include coffee, tea, cocoa, and timber while coarse grains are corn, soybeans, rice and wheat among others.
To invest in these commodities, there are four main ways of doing so. First, you can buy the physical commodities and store them. Second, you can buy the futures that are listed in main commodity exchanges. Third, you can invest in the underlying companies that mine or produce the commodities. Finally, you can also invest in the ETFs of these commodities. The second option is mostly preferred method because it is easy to enter and exit trades.
Before you start trading in commodities, it is important to note that many of them are highly volatile and highly recommended for people with many years of experience. Some of the most volatile commodities are zinc, aluminum, and tin. They are also thinly traded.
The most important thing you need to understand is on the demand and supply of the commodities. A commodity in high supply leads to lower prices. One in high demand leads to higher prices. This is the basic principle of economics and trade. Therefore, before you start to trade in commodities, you need to understand the supply and demand dynamics. To do this, there are organizations that provide this data. For example, OPEC and EIA are credible sources of data on crude oil while United States department of agriculture is an important organization in the demand and supply of crops. You need to know the exact times and day when the data is released.
Apart from the data, you need to stay informed. Doing this will help you know when there is a disruption in the supply of a commodity. For example, when there is a major earthquake in an oil producing country, the implication is that the price of crude will move up. The same is true when there is violence in a state that produces oil or when there is a drought in a country that produces coffee.
After this, you need to understand the basics of technical analysis. This is the use of mathematical calculations to help you make better decisions. Most of the indicators used today were developed by people who were involved in the commodities industry. Some of the most important indicators are the commodity channel index, the RSI, and the moving averages.