Commodities are raw materials or primary agricultural products that can be bought and sold. In this beginner-friendly financial markets guide, we’ll look at the types of commodities, what drives their prices, and why they’re an important asset class for traders and investors alike.
Main Types of Commodities in Financial Markets
There are four broad categories of commodities:
- Energy: Crude oil, natural gas, gasoline, heating oil
- Metals: Gold, silver, copper, platinum, aluminium
- Agriculture: Corn, wheat, soybeans, coffee, cotton
- Livestock: Live cattle, lean hogs, feeder cattle
Each of these commodities plays a unique role in the global economy. For instance, oil powers industries and transport, while gold is often seen as a safe-haven asset during uncertain times.
Why Trade Commodities? A Beginner’s Financial Markets Perspective
Commodities provide diversification in a portfolio, act as a hedge against inflation, and are often influenced by supply and demand dynamics that differ from stocks or currencies.
Traders are attracted to commodities because:
- They can experience significant price moves due to global events
- They react to weather, geopolitical tensions, and seasonal trends
- Some offer safe-haven appeal in economic downturns (e.g., gold)
How Commodities Are Traded: A Guide for Beginners
Commodities are traded on futures exchanges such as the Chicago Mercantile Exchange (CME), ICE, and NYMEX. But retail traders typically speculate on commodity prices using CFDs or spread betting, which allow them to go long (buy) or short (sell) without owning the physical product.
For example, you could trade a CFD on Brent crude oil if you think oil prices will rise due to OPEC supply cuts or geopolitical tensions.
Spot vs Futures vs ETFs in Financial Markets
There are multiple ways to gain exposure to commodities:
- Spot prices: Reflect the current market price for immediate delivery
- Futures contracts: Agreements to buy or sell at a fixed future date and price
- ETFs: Funds that track a commodity or group of commodities (e.g., gold ETFs)
Retail traders usually avoid physical delivery and focus instead on price speculation through online trading platforms.
What Moves Commodity Prices in Financial Markets?
Commodity prices are influenced by several major factors:
- Supply and demand: A drought can drive wheat prices higher; an oversupply of oil can push prices down.
- Geopolitics: Conflicts in oil-producing regions can spike crude prices.
- Weather patterns: Hurricanes or droughts can affect crops and energy supplies.
- Currency fluctuations: Commodities are priced in USD, so a weak dollar often makes them cheaper for non-US buyers, boosting demand.
- Economic growth: Higher demand for raw materials in growing economies lifts commodity prices.
Gold: The Classic Safe Haven in Financial Markets
Gold is unique among commodities. It’s not consumed in the same way as oil or corn, and it doesn’t generate income like stocks. But in times of uncertainty, investors flock to it for protection.
Gold’s price can rise during periods of inflation, financial crisis, or currency devaluation. It’s also influenced by central bank buying and real interest rates.
Example: Oil Price Shock
Imagine a geopolitical conflict causes major supply disruptions in the Middle East. The perceived risk to oil supply can cause a surge in crude oil prices—even before any actual physical shortage occurs.
A trader may go long on Brent oil in anticipation of rising prices. But sharp volatility means the trade needs tight risk control.
Commodities and Inflation: A Key Financial Markets Insight
Commodities are often used as a hedge against inflation. When inflation rises, the value of currency falls—but the price of real assets like oil, gold, or wheat tends to increase. This makes them attractive during times of rising prices.
Final Thoughts
Commodities are a diverse and vital part of global markets. Whether it’s energy powering economies, metals building infrastructure, or grains feeding populations, they offer unique trading opportunities.
This beginner-friendly financial markets guide highlights how supply shocks, weather events, and global tensions all shape commodity prices. In the next lesson, we’ll explore how to trade these commodities in practice.