A Comprehensive Guide to Understanding Commodities Before Investing

         For those who have entered the trading world in recent times, commodity trading might not be familiar, as there are various financial products to choose from. However, in reality, commodity trading has never disappeared from our world and continues to be a driving force behind our daily lives. From seeds and oil to gold, these are all commodities that play a crucial role in producing the goods and services we use every day. Today, we'll take you on a detailed journey to understand commodities, providing a solid foundation before you invest.

What are Commodities?

          Commodities are products or raw materials that play a crucial role in the production of various goods and services we use in our daily lives. These items typically have uniform quality standards regardless of where they are produced, making them easily tradable in global markets. Examples of familiar commodities include oil, gold, rice, coffee, and various minerals. These goods are closely linked to the global economy as they are fundamental factors in the production of many consumer goods. Commodity prices often fluctuate due to various factors such as weather conditions, natural disasters, or international political situations, which affect production costs and the final prices of everyday products we use.

How do Commodity Prices Fluctuate?

           Commodity prices are determined by global supply and demand, rather than by any single producer, making them susceptible to market conditions, economic factors, and other influences that affect supply and demand. These factors include weather conditions, natural disasters, or policies of major producing and consuming countries. Due to these characteristics, commodities are widely traded in global markets and are often used as investment tools and financial risk hedging instruments. To summarize, here are the main factors that influence commodity prices.

1. Supply and Demand

Commodity prices are determined by the balance between global supply and demand. Changes in demand or production volume can significantly impact prices.

2. Weather and Natural Disasters

Especially for agricultural commodities, unpredictable weather conditions such as droughts, floods, or other natural disasters can greatly affect crop yields and prices.

3. Geopolitical Factors

Political conflicts, wars, or economic sanctions in major producing countries can impact commodity prices.

4. Policies of Producer Groups

Decisions made by major producer groups, such as OPEC for oil, can influence prices in the global market.

5. Speculation

Trading activities by speculators in the commodities market can increase price volatility.

6. Technological Advancements

The development of new technologies can affect the production or use of commodities, which will impact prices in the long term.

7.  Exchange Rates

Since commodities are often traded in U.S. dollars, changes in the dollar's value can affect commodity prices.

8. Consumption Trends

Changes in consumer behavior, such as increased health consciousness, can impact the demand for certain types of commodities.

Types of Commodities

Generally, we can divide commodities into two main categories: Hard Commodities and Soft Commodities. Each type has its own distinct characteristics.

Hard Commodity

Hard Commodities are goods that are extracted or mined from nature. They are non-renewable natural resources that require high investment for production, typically operated by large companies. These commodities can be stored for long periods and have lower price volatility compared to Soft Commodities. Most trading of Hard Commodities occurs in international markets. Examples of Hard Commodities include various metals such as gold, silver, copper, and iron, as well as energy sources like crude oil and natural gas.

Soft Commodity

Soft Commodities are goods that come from agriculture or animal husbandry. They are renewable agricultural products that can be replanted or replenished. Most Soft Commodities are agricultural products used for consumption or processed into other products. They have a limited shelf life and higher price volatility compared to Hard Commodities due to their susceptibility to weather conditions and environmental factors. Examples of Soft Commodities include agricultural crops like rice, corn, soybeans, coffee, and cocoa, as well as animal products such as beef and pork.

Understanding Factors that Affect Commodity Prices

          Commodity trading is quite complex. Before starting to trade, we should thoroughly understand the various factors that influence commodity prices. This is because commodity prices don't change without reason; many factors are involved. Knowing and understanding these factors will help us analyze price trends more accurately and increase our chances of making successful trading decisions.

Let's look at the factors that impact commodity prices

• Natural supply and demand : This is a fundamental factor affecting commodity prices. If demand exceeds supply, prices will rise. Conversely, if supply exceeds demand, prices will fall. For example, if corn production is high but consumption demand is low, corn prices will drop.

• Speculative supply and demand : Besides natural supply and demand, there's also supply and demand created by speculation. Investors or traders may buy commodities to hold and sell at higher prices, or sell commodities in advance expecting to buy them back at lower prices. These behaviors can cause commodity price volatility.

• Weather conditions : Weather has a significant impact on commodity prices, especially agricultural products. For instance, if a drought occurs, crop yields will decrease, causing prices to rise. Or if there's an unusually cold winter, it may increase the demand for oil for heating, resulting in higher oil prices.

• Natural disasters : Natural disasters like earthquakes, storms, or floods can severely impact commodity prices. They may destroy production sources or transportation routes, causing a sudden decrease in supply. For example, if an earthquake occurs in an oil-producing region, it could cause oil prices to spike rapidly.

• War : War is a factor that severely affects commodity prices, especially if it occurs in a major producing country. War can halt production, disrupt transportation routes, or lead to trade sanctions, all of which can cause significant volatility in commodity prices. (For example, during the Russia-Ukraine war, oil prices once surged past $120 per barrel.)

• Policies of producing countries : The policies of commodity-producing countries greatly influence prices. For instance, OPEC's decision to increase or decrease production directly affects global oil prices. Or export promotion policies of major rice-producing countries could change global rice prices.

Recommended High-Volume Commodities

Crude Oil 

• WTI Crude Oil - The benchmark for oil prices in North America

• Brent Crude Oil - A key global benchmark for oil prices, directly impacting energy costs, stock markets, and transportation fees

Gold

• Gold is another high - volume traded commodity. Investors often view gold as a safe-haven asset, especially during periods of economic uncertainty.

Natural Gas

• Natural gas is an important energy source traded in large volumes. It's used for electricity generation, heating, and as a raw material in various industries.

Agricultural Products

• Soybeans : A crucial protein source for human and animal consumption, also used in non-food products

• Corn : A widely cultivated crop with diverse uses, serving as a staple food, animal feed, and industrial raw material, such as in ethanol production

• Coffee : In high demand worldwide, a globally popular beverage

Industrial Metals

• Copper : A highly traded metal due to its widespread use in manufacturing industries

• Iron : An essential raw material in manufacturing, infrastructure, and construction industries

Strategies for Trading Commodities

         Trading commodities requires understanding multiple dimensions. Professional traders often use various strategies to analyze and predict price movements. Generally, these strategies fall into three main categories: fundamental analysis, technical analysis, and situational analysis. Each method has its strengths and limitations. Combining these three approaches helps traders make more informed and effective decisions.

1. Fundamental Analysis 

Fundamental analysis involves examining macroeconomic factors that affect commodity prices, focusing on supply and demand. Assessing the demand and production volume of a specific commodity helps understand future price trends. External factors, geopolitical events, weather conditions, and government policies all impact commodity prices. Economic indicators such as GDP, inflation rates, and interest rates provide an overview of the economy that influences commodity prices.

2. Technical Analysis

Technical analysis uses historical price data and trading volume to predict future trends. This method includes using indicators to identify trends and appropriate entry and exit points. Pattern analysis, such as Head and Shoulders, Triangles, and Flags, helps predict trend changes. The Relative Strength Index (RSI) aids in identifying suitable buy and sell points for short-term trading.

3. Situational Trading Strategies

These strategies adapt to market conditions and include Range trading which is Suitable for markets moving within a range, buying at support levels and selling at resistance levels. And Breakout trading which is Entering a position when the price breaks through significant support or resistance levels to benefit from rapid price movements.

4. Seasonal Trading

Seasonal trading relies on understanding the production and consumption cycles of different commodities. Some agricultural products have prices that vary according to planting and harvesting seasons. It also considers the relationship with the USD, as commodity prices often have an inverse relationship with the US dollar. Traders may consider selling when the USD strengthens and buying when it weakens.

Additional Points on Commodity Trading

Continuous learning will help you find suitable strategies and achieve success. The market offers many ways to trade commodities. Remember to study risk management carefully and maintain trading discipline. Keep in mind that every trade has both opportunities and risks, so start gradually, learn from experience, and adjust your strategy according to the situation. With patience, determination, and an open-minded attitude towards learning, you can develop skills and create success in commodity trading. The final advice is, “Don't be careless, don't be greedy, and don't trade emotionally!” Wishing everyone success.