Gold, cocoa and cotton are among a number of recent rising commodities. But anyone keen to try their hand needs to remember that winners can quickly become losers in this fast-moving scene.
Commodities traders who came out on top during the past month can award themselves a gold medal, raise a celebratory cup of coffee and maybe splash out on a new cotton skirt or pair of trousers.
In doing so, they would be making use of three of the winners in recent commodity markets.
Trading these markets is not for the faint-hearted. Indeed, it used to be said that anyone thinking of dealing in commodities ought to lie down until the feeling passes.
Products that make other products
But even by the usual standards, these have been turbulent times, with prices buffeted by political developments, fears of recession and the prospect of military conflict.
Here, we will look at the eight most markedly rising commodities of recent weeks and examine the factors behind their success. But first, a look at the commodity market in general and recent developments.
Commodities comprise a unique asset class. Behind each trade is a physical product, although the vast majority of commodity deals never come anywhere near actual delivery.
It may be helpful to think of commodities as products that will go into other products: wheat into bread, for example, or gold into jewellery. Commodities split into three main groups: “hard” commodities such as metals, “soft” commodities such as wheat or maize, and energy commodities such as oil and gas.
An important feature of the market is that commodities are traded in standard contracts that specify precisely the sort of metal or agricultural product, to take two examples, that is being traded.
One of the best-known standards is the “good delivery bar” in the London gold market, which specifies the “fineness” of the bullion. This standardisation leads to a second feature of commodities, which is that the origin is irrelevant. Your gold may come from Russia, or South Africa, or North America – or a bit of all three. It isn’t relevant and you don’t need to know.
Recent months have seen some marked trends in commodity markets. One has been the surging performance of gold, while another has been a fairly dismal showing from oil. Even those with no intention of trading commodities scrutinise such movements for economic information – both these trends suggest recession may be imminent, given gold can protect investors’ wealth in a downturn while less oil is needed when parts of world industry are idle.
For anyone planning to trade in these markets at a time of rising commodities prices, there is bad news and good. The bad news is that the weather and other aspects of growing conditions can play havoc with production and thus with prices – agricultural commodities can be notoriously volatile. Also, developing tropical countries are more prone to political instability than those in the developed world.
“Political economy zombies”
The good commodity news is that emerging-market success is bringing into existence a burgeoning middle class with a growing taste for what were previously considered luxuries, including, of course, chocolate, a cocoa derivative. So, the fundamentals of cocoa and coffee demand are strong and likely to remain so.
Our next heading covers just two commodities – US Cotton and US Sugar – but these are bedrock agricultural products of the world’s largest economy. Both are intensely political in nature, given the powerful agricultural lobbies in Washington.
Cotton has received controversial subsidies, and, while sugar does not do so directly, it has benefitted from indirect subsidies and protectionist measures. In December 2018, Bloomberg, commenting on the latest farm legislation, criticised “the elaborate protections and subsidies given to the nation’s wealthy farmers of sugarcane and sugar beets,'' adding: “Their ability to fend off foreign competition for nearly two centuries is a case study in the way that protectionist measures can become political economy zombies, defying all efforts to kill them off.”
Both industries have been told by development campaigners that they really ought to go out of business and allow producers in poorer countries with more suitable climates a fair chance to sell on world markets. They show no signs of doing so and are currently seeming to ride a wave of consumer demand fuelled by loosening US monetary policies and fiscal relaxation.
Awareness of volatility
Our final group consists of three precious metals: gold, silver and palladium. Here, the factors driving prices are different between gold and silver on the one hand and "link-tool" href="https://capital.com/trade-platinum">palladium on the other. Prices for both types of bullion are being affected by political uncertainty, geopolitical tensions and a worsening global growth picture.
These are among the classic conditions for a gold-price surge, of which soaring inflation is the only one currently absent. Silver gets tugged up in gold’s wake as an alternative for investors whenever the yellow metal seems overpriced.
Palladium, on the other hand, is essentially a story of industrial demand. The metal is key to the catalytic converters long installed in many cars to reduce pollution.
Trade Palladium Spot CFD
Although car sales worldwide have drifted down, the price is being supported by fears of dwindling stocks of the metal at a time when China is tightening its emissions standards.
So, our eight champions are very different commodities facing different challenges. That they are so varied illustrates another important point about commodities which is that, with few exceptions, such as gold and silver, each is one of a kind. Standardisation applies within each commodity but not among different ones.
Should you trade commodities? Yes, quite possibly. It can be a rewarding activity, and not just in the financial sense nor only when commodity prices rise. There is something satisfying about dealing in “real world” assets dug out of the ground, harvested in the field or pumped out of a drilling rig.
But you need to be “volatility aware”. This is an asset class prone to big swings and vulnerable to political, diplomatic and economic factors. The much-feared global recession looms large in this last category.
And you need to put in some commodity prices analysis, study the commodity market news and choose your assets carefully. One thing is sure – our current champions will not all remain at the top for long, as winners become losers and vice versa.
In commodity trading, that is the name of the game.