COMMODITY TRADING: THE BEST BET FOR HAPPY FUTURE
Updated: Jun 28
Trading in commodities futures has a long history. However, organized trading on an exchange started in 1848 with the establishment of the Chicago Board of Trade (CBOT). Commodity Market is about the trading of precious metals, energy, oil, spices & so on.
Gold and other metals can be accessed in several ways including traditional physical holdings, futures contracts, D-mat forms, ETFs, and through correlated markets such as mining stocks. Each mode of holdings has its advantages and disadvantages but with so many options available, investors of all types should be able to find a product to match their temperament.
INVESTORS THINK ABOUT BENEFITS!
If you are an investor, commodity futures offers the following benefits:
High leverage: You can take a position in a particular commodity by paying only a fraction of that value as a margin. Moreover, the margins in the commodity futures market are lower than equity futures and options.
Less manipulation: Governed by international price movements, commodity markets are less prone to rigging or price manipulation.
Diversification: Commodity prices are prone to supply-demand dynamics, weather conditions, geopolitical tensions, and natural disasters. Accordingly, commodities are an independent asset class and can prove to be an effective means of diversification in one’s investment portfolio.
HOW DOES COMMODITY MARKET LOOK IN THE CURRENT SITUATION?
After a turbulent 2020 for all commodities, the coronavirus pandemic has left the commodities industry reeling, disrupting supply chains and slashing demand. Performance has varied across the commodities sector, with some-such as metals and agriculture-experiencing effects that are likely to be short-lived when the economy begins to rebound. In others, the fallout of the pandemic could have more lasting implications, as the chaos of COVID-19 has exposed existing weaknesses or the need for structural change.
While challenging, the current climate creates opportunities, and two, intertwining developments-the ever-increasing focus on ESG and rapidly evolving technology-are key factors in driving change.
There is debate as to whether coronavirus will accelerate the energy transition. S&P Global Platts Analytics believes that, while coronavirus has reduced long-term global oil demand by 2.5 million b/d, this is not enough to substantively bring forward the year of peak oil demand that we project for the late 2030s.
In addition, while the pandemic is forecast to cut energy sector CO2 emissions by 27.5 gigatons over 2020-2050—equivalent to almost one full year of emissions—more than 10 times this reduction is needed to meet a scenario in which global warming is limited to 2 degrees through 2050.
In short, for both long-term global oil demand and supply, the impact of coronavirus is a decided step down, but not a step change.
Trading commodities like crude oil or gold may sound alluring because of the vast sums of money they generate in global commerce. But trading commodities isn’t a get-rich-quick scheme. Like any kind of market speculation, it is a skill that requires knowledge, practice, and dedication.
The compelling combination of a sustained push by regulators along with the intrinsic benefits that centralized exchanges can offer developing commodity markets, suggests that commodity exchanges are set to explode – particularly for physical commodities with long value chains where storage, quality, origin, and secure transfer of ownership are key.