Why Would You Want To Invest In Commodities Anyway?

10 mins

Why Would You Want To Invest In Commodities Anyway?

What Moves Commodity Prices

Acts Of Gods And Men

3 mins

What affects energy commodity prices? The alpha and omega of markets: supply and demand. For energy commodities like oil, both can change rapidly and explosively. Demand climbs as economies grow – as oil fuels everything from construction to cars – and weakens during recessions. There are also seasonal fluctuations in demand for heating. Use of both oil and gas goes up when it’s winter in the northern hemisphere (where 90% of people live) 🥶

On the supply side of the equation, because so much oil comes from volatile regions in the Middle East, politics affects its price. War or international embargo can curb supply for years, driving the price up.

Oil supply is tightly controlled by OPEC, a group of major oil-producing countries led by Saudi Arabia. They meet regularly to agree how much to produce – and the outcomes of the meetings are closely watched by energy traders. More recently, the US has flooded the market with shale oil (oil extracted from shale formations), becoming the world’s top oil producer.

Like with all markets, remember that oil prices will rise on unexpected disruptions. A long-foreshadowed war, like Kuwait in the 90s, will be reflected in higher prices long before any bullets are fired. Oil prices actually dropped by half once that conflict finally kicked off.

How about metals? Precious metals are seen as a safe store of value, particularly when investors become concerned about rising inflation. Traders fled to gold in the early stages of the 2008 financial crisis, as the global financial system teetered. Later in the crisis however, when it looked like the economy could be entering a long depression – and raising the spectre of deflation – the gold price lost its shine.

Other metals like nickel and cobalt can see spikes in demand when new technology requires them – because nickel is crucial in batteries, it could benefit from an electric-car boom. And the price of steel has been driven higher by the construction boom in emerging markets like India and China – a skyscraper a day keeps the steelmaker in pay… 🏗️

And agriculture? Weather can washout agricultural supplies – or leave you high and dry. We need food, so a constrained supply shoots up prices with everyone jostling for bread. But you can beat that inflation with commodity trading: when the price of wheat soars, so does your grocery bill; but your wheat trades beforehand can see you come out on top. And a warming climate could throw many commodity prices into flux – check out our Climate Change Pack for more on that. Disease can blight a nation too: Canada’s early-2000s mad cow disease scare drove a stampede of bullish demand for US beef.

The rules of investing reign eternal: do your research, build a sensible and diverse portfolio, then pray. 🙏 If all else fails, at least you’ll have a big pile of soybeans to dive into.

In this Pack you learned:

🔹 Commodities trade through futures contracts, which let you fix a deal to buy or sell in advance.🔹 Contango means people expect the futures contracts to fall in value, backwardation means people expect them to gain in value.🔹 You can trade commodities by buying futures contracts, or with exchange-traded funds.🔹 Commodity prices are affected by everything from a geopolitical fracas to extreme weather.

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