Understanding Commodity Trading (Part II)
Commodity trading can be fun and profitable if done well. However, commodity trading is never easy. It’s not meant to be. It does not matter whether you are trading gold, soybeans or bonds; a successful speculator has to keep an eye on what is happening in many markets around the world.
We must learn to trade like mercenaries, trading not on the bull side or the bear side but on the right side. Commodity trading is certainly not for everyone. So what is the right vehicle for commodity trading? It depends on what commodity you want to invest in.
Commodity futures: Although many new futures products have been introduced but the physical commodities still are the major components of the futures market. Until 1970s, the futures markets and commodities were synonymous because the futures markets were all about those physical products that you could touch, taste, grow, mine, consume or deliver.
Like other segments of the futures markets, commodities can be broken down into several categories like metals, energy, grains, livestock, food and fiber. Metals include copper, gold, palladium, platinum, silver.
The energy futures market has become one of the most important gauges of the world economic and political developments. Crude oil futures began trading in 1983. Remember 2008, when the prices of crude oil jumped from around $60-70 to around $145. It was all due to the speculation by the hedge funds in crude oil futures. Natural gas futures contracts also get traded on NYMEX. Until 1978 when the New York Mercantile Exchange (NYMEX) launched trading in heating oil, Futures on Energy did not begin trading
Now gold is a very important precious metal. Gold futures contracts trade on NYMEX! CBOT offers mini gold futures contract with lower margin requirements for retail investors. Similarly you can trade copper, silver, platinum futures contracts on different exchanges.
Chicago Mercantile Exchange (CME) offers milk futures contracts as well as the live cattle contract. Meat markets also have a number of futures contracts like the feeder cattle contract, lean hog futures contracts, pork bellies contracts like the other commodities markets.
Agricultural markets are seasonal and offer many futures contracts that you can trade. These markets are highly dependent on the weather and other natural conditions. You will also find coffee sugar, orange juice and coca futures contracts traded on various exchanges. Similarly you can find many futures contract that cater to the agricultural markets like soybeans futures contracts, corn futures contracts.
There is another way to invest in the commodity markets. You can invest in companies that specialize in the production, transformation and distribution of these commodities. Equity markets offer access to commodity trading in an indirect manner although the futures markets offer the most direct way to invest in commodity trading.
Instead of directing trading energy futures contracts you can invest in energy stocks. For example by investing in the diversified mining companies like BHP BILLITON or electric utilities or the integrated energy companies like EXXON MOBIL will still allow you to profit from the commodities boom.
Commodities mutual funds and exchange traded funds that deal with the commodities sector are another way to invest in commodity trading. You can also invest in the Master Limited Partnerships (MLPs) that invest in energy infrastructure like the oil pipelines and natural gas storage facilities.
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Learn Commodity Trading. Think About Futures Trading!
