As with every financial market, the commodity market is one that’s filled with many traders partly due to its high levels of volatility, allowing one to profit from falling or rising prices.
One of the most important factors to consider when trading commodities is liquidity, as it’s linked to the ease with which a trader can buy and sell the commodity. It’s not only a measure of how many buyers and sellers there are, but whether transactions can take place easily.
When there is a high supply and demand and a strong level of trading activity, the respective market is therefore seen as highly liquid. A liquid market is generally correlated with less risk due to its high demand, and the probability that another trader is likely taking on the other side of the position.
Trading commodities with higher liquidity means there will be less chance of slippage. As a gentle reminder, slippage is the difference between the price you’re quoted and the actual price at which the trade is executed. Hence why it’s advised to trade in commodities with higher liquidity, since lower liquidity could potentially lead to greater losses – something any trader should avoid.
To put it simply, if you find yourself trading commodities with low liquidity, you’ll be at risk of facing wild price swings. Consider using a stop-loss to ensure your position is closed at your pre-selected price level – a smart way to manage risk.
For any trader, diversifying your portfolio is a simple and smart way to manage risk and trading commodities does just that. In this article, we’ll break down some of the higher liquidity, most-traded commodities in the world.
So, Firstly, What Are Commodities?
Commodities are either known as agricultural products or raw materials. Agricultural products, however, are generally used as the building blocks for other goods and services. From sugar to crude oil, from gold to copper, commodities cover a range of goods.
Let’s Start With Brent Crude Oil
Even if you’re new to commodity trading, you’ve probably heard of the two major types of crude oil that act as global benchmarks for the industry: WTI Crude Oil and Brent Crude Oil.
Although we’ve seen the world move toward greener choices in recent years, crude oil is very much still in high demand. From heating our homes to producing fertilisers, to powering our cars, it’s not a commodity you can ignore.
Extracted from the North Sea, Brent Crude is a major trading classification of sweet light crude oil that acts as a benchmark price for oil purchases worldwide. It’s known as sweet because of its low sulphur content and light because of its low density. It’s this combination that results in Brent Crude being pretty simple to refine.
What Affects The Price of Crude Oil?
The price of Brent Crude depends heavily on factors that govern global supply and demand, and is extremely influenced by geopolitical events.
Both the demand and price of oil are linked to economic performance. During moments of economic turmoil, oil demand generally decreases, as does its price. Whereas an economic boom can result in a larger demand for oil to satisfy increased transportation and production, soaring prices.
So, What Influences The Supply of Crude Oil?
The global supply is heavily influenced by the Organisation of the Petroleum Exporting Countries (OPEC), responsible for setting the production quotas for its member countries to assert pressure on global oil prices.
West Texas Intermediate (WTI) Crude
Another benchmark for global oil prices is West Texas Intermediate (WTI) crude. Also described as sweet and light, WTI is drilled in various states across the US.
So, What Affects WTI’s Price?
Similarly to Brent Crude, WTI also depends largely on the level of demand. This is because once drilled, crude oil is transported to Cushing in Oklahoma. But, as the area is landlocked, it has made international export quite unmanageable.
Following a reverse in the way oil was transported, however, WTI has since then become much easier to export, helping bridge the gap between WTI and Brent Crude, and therefore showing a much closer correlation in their prices.
Gold needs no introduction. This precious metal and safe-haven asset has been sought after for its beauty for centuries and centuries and is known for its use in jewellery production as well as a vehicle for investment.
Gold is primarily mined in the US, China, Australia and Russia. Its safe-haven recognition exists because it tends to retain value or even soar during times of economic hardship or political turmoil.
What Does This Mean?
Investors turn to gold during extremely volatile and uncertain moments, shying away from other options and instead opting to invest in safe havens like gold.
What Causes The Price of Gold to Fall or Rise?
Since the demand for gold rises during uncertain times, like the ones we’ve been experiencing over the last year, the price has been known to skyrocket. What’s more, gold can be used to hedge against currency devaluation or inflation, resulting in an inverse relationship with the USD.
Similar to gold, this precious metal has also been highly sought after. However, unlike gold, the demand for silver also arises from its industrial uses, such as in the manufacture of solar panels, photographic films, and electrical products.
Its demand is still controlled, however, by jewellers and investment just like gold. And to wrap up the silver vs gold party, gold wins the day given the fact it’s deemed as the more popular, or rather, reliable, precious metal of the two – purely because gold’s value is less dependent on industry.
So, What Affects Silver?
While silver is considered a safe-haven asset – its price also rising during economic uncertainty – silver is often extracted from the ores of other metals, resulting in price fluctuations in the price of these other metals, thus affecting the price of silver.
Copper is a very popular and important metal in the modern world. Widely used in the electronics and building industries, copper is considered an excellent conductor of electricity and heat. The key producers of this metal are Chile, China, the US and Peru.
What Affects The Price of Copper?
Due to its wide usage in the manufacturing industry, the price of copper is largely dependent on economic output, meaning demand for the base metal is seen as a reliable indicator of the overall economic health.
Indeed, emerging markets continue to develop rapidly, accounting for a large proportion of the copper market, due to their growing demand for new accommodation, electronics, and transport infrastructure.
During economic uncertainty, when we’re likely to see a steep decline in growth in emerging markets, the price of copper can be hit hard, harming the economy.
Trade Commodity CFDs With TIOmarkets
If you’re trading CFDs, you can profit from both rising and falling prices, while benefitting from the use of leverage. As we’ve seen with the recent pandemic, the price and demand for metals can be prone to large swings up or down based on economic turmoil, recovery and economic conditions. Just remember each commodity is different and their prices are affected by different factors.
Using risk tools like TIOshield (only available at TIOmarkets) can help to protect your trades against sudden breaking news that may swing the markets one or another. Register an account with us today to start trading any of these commodity CFDs or any other instruments.
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