What is a Commodity and its importance?

Introducing the commodity and reviewing its position in the forex market

Contents

What is a Commodity?

Commodities are raw materials traded globally, including agricultural products, metals, and energy products. Commodities form the global economy's basis and are necessary for production and consumption. In Forex trading, these products are popular among traders due to their high liquidity and volatility, and traders trade them as CFDs. The most traded commodities in the forex market are crude oil, gold, silver, and agricultural products such as wheat, corn, and soybeans, and various factors such as supply and demand, geopolitical events, economic data, weather patterns, and Government policies influence their prices.

Read More: What is a currency pair? (What is traded in forex?)

Types of commodities

Generally, goods or commodities, are divided into two categories:

• Hard commodity
• soft commodity

Hard Commodity: It's usually classified as goods extracted from the ground. These goods can include metals, ores, and oil products (energy).

Soft commodity: It refers to goods that are planted and grown, such as agricultural products. This category includes wheat, cotton, coffee, sugar, soybeans, and other harvestable items.

In another category, the commodity market is divided into three different types:

• Agricultural commodities
• Energy commodities
• Metal commodities

Further, we explain these types in detail.

Agricultural Commodities: The goods included in this category are sugar, coffee, cocoa, cotton, corn, and wheat. Many believe that agricultural markets are not traded widely, but this is not true, coffee is the second largest commodity in the world after oil. Factors such as Supply/demand, weather, trade agreements with other countries, new technology, taxes, etc., affect the price of agricultural commodities.

Energy Commodities: This commodity type is quite popular and includes Brent crude oil, WTI crude oil, gas, etc. These goods are significant because they are an integral part of various industries. They have the power to move the entire economy. For example, rising oil prices affect airlines, paint industries, rubber companies, etc.

Countries like Russia and Saudi Arabia are heavily dependent on oil. Factors like supply and demand play a major role in determining oil prices. Some other factors (specific to oil) include the OPEC meeting result (Organization of the Petroleum Exporting Countries), political statements, international agreements, etc.

Metal Commodities: This category includes precious metals such as gold, silver, platinum, and palladium. Trading precious metals in the distant past was only possible for wealthy investors. But now, with the CFD trading introduction, traders can invest in various metals easily and even with leverage.

Traders are looking for a reputed forex broker, especially for buying and selling gold, a popular commodity. In this regard, if you are looking for a reliable forex broker to trade gold with a low spread, reasonable commission, and 24-hour support, Trendo Broker can be one of the best options.

Supply and demand also affect gold and other metals prices. Other factors like economic changes in China and India (since they are the world's largest consumers), taxes, and changes in fed interest rates also affect the price of these goods.

As the most popular asset category, gold has historically shown a low correlation with other asset categories, such as stocks and bonds. Gold often moves independently of other assets, making it a valuable asset to diversify an investment portfolio. Trading gold at forex brokers allows traders to use gold's potential as an investment without physically owning the metal.

Read More: Features of the best broker for trading gold.

What is the Commodity Index?

A commodity index is an index that depends on a basket of commodities' prices and returns. These indices are often available for investment through exchange-traded funds (ETFs). The value of these indices fluctuates based on their primary commodities. Each commodity index in the market has a different composition in terms of what commodities it is composed of. For example, the CRB (Commodity Research Bureau) index consists of 19 different commodity types, including cocoa, soybeans, gold, crude oil, and wheat.

Commodity indices are different in terms of weight as well. The Dow Jones Commodity Futures Index, created in 1933, was the first index to track commodity prices. Goldman Sachs launched its commodity index, the Goldman Sachs Commodity Index (GSCI), in 1991. The Goldman Sachs index was renamed the S&P GSCI when it was acquired by Standard & Poor's in 2007. The Bloomberg Commodity Index family (BCOM) and the Rogers International Commodity Index (RICI) are two more popular commodity indices.

The commodity price fluctuations' impact on the forex market

When a country exports goods to the international market, the transaction fee is paid in that country's currency. Therefore, when the price of goods increases, it indicates the exporting country's domestic currency will be in high demand. Importers of these goods must convert more of their currencies into the exporting country's currency. As a result, that country's domestic currency value will increase compared to other currencies. On the other hand, the decrease in the price of goods means that a smaller amount of the country's domestic currency is needed to buy exports. As a result, the exporting country's domestic currency value will slightly decrease compared to others.

Read More: The best time to trade forex market currency pairs.

Commodity in forex brokers

Although forex is primarily a market for trading various currencies, most forex brokers, including Trendo, offer a variety of other assets. These brokers help their clients diversify their investments by doing this. Trendo Broker allows the trading of precious metals such as gold, silver, etc., traders can also trade energy commodities such as crude oil in this broker.

Tips on commodity trading

Traders should consider the following points when investing and trading goods:

• Checking the commodity production or extraction rate
• Using technical and fundamental analysis

We explain each of the points further.

Checking commodity production or extraction rates: Checking commodity production or extraction rates: Traders can check commodity production and extraction rates as this factor can give them clues about the market direction. Also, the goods inventory amount can be an excellent tool for analyzing commodity markets. A constant decrease in inventory levels can lead to higher prices, while an increase can lead to lower prices.

Using technical and fundamental analysis: Technical analysis is another widely used method for commodity trading. This type of analysis uses past prices and trends to predict future prices. Technical traders do not consider fundamental factors and only monitor prices. However, we advise considering fundamental factors and technical analysis to get the best trading results when trading commodities.

Summary

Commodity trading in the forex market is a great way to diversify your trading portfolio. Various factors, like supply and demand, geopolitical events, economic data, weather patterns, and government policies, affect these commodities' prices. Commodities offer high return potential, but they also carry a high level of risk, and traders must have a good understanding of market trends and manage their risks effectively to be successful in commodity trading.