Commodity trading

Commodities are essential to the global economy—and humanity as a whole. At FOREX.com, we offer trading opportunities in various commodities, including two of the largest on the market: gold and silver. In the next lesson, we’ll take a closer look at how trading them works.

Let’s explore how companies and traders buy and sell energy, agricultural products, precious metals, and more.

What are commodities?

• Soft vs. hard commodities

• Categories of commodities

• Who trades commodities?

What are commodities?

Commodities are natural products consumed or used by people, animals, or industries, such as oil, sugar, gold, and wheat. These products have been traded for thousands of years, feeding people and livestock, powering production, and more.

Commodity trading remains just as crucial today, with commodities playing a key role in the global economy. They are the building blocks of the modern economy, making them an attractive prospect for many traders.

Defining commodities

Producers, consumers, and speculators trade billions of dollars in commodities every day. To facilitate such trading, it is essential for buyers and sellers to be assured that every asset meets standard size and quality.

For this reason, all traded commodities must be fungible. This means they can be exchanged for another item of the same kind, regardless of origin.

For example, a gold bar mined in South Africa must have the same quality and size as a gold bar mined in Australia. This ensures that commodity traders can focus on trading without having to inspect or evaluate each item individually.

If a product is not fungible—such as clothing or electronics—it cannot be traded as a commodity.

Soft vs. hard commodities

Commodities can be divided into two main groups: soft and hard.

Soft commodities are goods grown or raised for human or animal consumption. These products are cultivated in different parts of the world but are never mined or extracted.

Hard commodities, on the other hand, are raw materials extracted, mined, or pumped from the earth. They are the backbone of industrial production, powering machines and providing essential resources.

Categories of commodities

In addition to being classified as soft or hard, commodities are often grouped into three main categories: energy, agricultural products, and metals.

A table comparing these three types of commodities would include examples such as metals, agricultural products (also called "softs"), and energy resources.

Energy

Energy commodities are extracted from the earth. Their prices can significantly influence the global economy, and their value is often determined by the state of the economy. For instance, a growing economy can lead to increased demand for oil, driving its price up.

Examples:

• American oil (WTI or NYMEX)

• European oil (Brent)

• Natural gas

WTI vs. Brent

Did you know that the oil market has various segments because oil quality differs by region?

The two main types are West Texas Intermediate (WTI, American oil) and Brent Crude (oil from the UK). While their prices are often similar, they are not identical.

Agriculture

Agricultural commodities form the basis of global food supplies for both humans and animals. These products are grown or bred and are less popular among traders compared to energy or metals. Weather conditions and spoilage often significantly impact their prices, leading to considerable price volatility.

Examples of soft commodities:

• Coffee

• Corn

• Cotton

• Orange juice

• Soybean oil

• Wheat

Metals

Metals are divided into two main groups: precious metals (like gold, silver, or platinum) and industrial metals (like aluminum, lead, or copper). Investors worldwide consider gold a "safe haven," meaning its price often rises during uncertain times. On the other hand, the prices of industrial metals are driven by demand from industries that use them in production.

Examples of Hard Commodities:

• Copper

• Gold

• Palladium

• Platinum

• Silver

Who trades commodities?

There are four main types of participants in the commodity market. Each has different goals and requirements for trading:

• Producers

• Consumers

• Speculators

• Hedgers

Producers are companies that produce or extract commodities. For example, farmers grow soft commodities, while miners and oil companies focus on hard commodities. Their goal is to secure the highest possible price for their products and guarantee income in advance.

Consumers buy products from producers and use them. For instance, the jewelry industry is one of the largest consumers of gold, while airlines consume large quantities of oil. If consumer demand for a commodity decreases, its price will likely drop as well.

Speculators aim to profit from the price volatility of commodities without intending to own any physical assets. Instead, they trade through derivatives like futures or options.

Commodities often move inversely to other markets, such as stocks or bonds. For example, a stock market crash can increase the price of gold. Hedgers are investors who use this relationship to protect their stock or bond portfolios from adverse market movements.