Introduction

Introduction

Commodities are basic goods used in commerce. Commodities are usually classified under Metals, Energy, Agricultural Products and Environment. In modern economics, commodities are marketable items produced to satisfy wants or needs. Unlike stocks, commodities have intrinsic value and play a huge role in influencing the global economy. No matter where we live, commodities are being regarded as essential to modern life.

Metals

Metals are typically grouped into one of two categories:

  • Precious metals – rare, naturally occurring metallic elements
  • Base Metals – metals widely used in commercial and industrial applications

Precious Metals are rare, naturally occurring metallic elements with high economic value. They serve two purposes, as industrial elements and investments. Manufacturers use these metals to make electronic components, jewelry, dental equipment and catalytic converters among other things.

Investors, on the other hand, collect coins and bars made out of precious metals. This second use – as investments – makes precious metals the objects of intense speculation in commodity markets. Precious metals traders see these commodities as a form of money that holds its value better than printed paper money.

The precious metals with active commodities markets include the following:

Gold

Gold is the main precious metal utilized by speculators as an investment vehicle. Although manufacturers use the metal in some electronics parts, the vast majority of gold demand derives from jewelry manufacturers and traders. Many consumers see gold jewelry as a form of investment.

Silver

Silver Manufacturers also use silver in both electronics and jewelry, while traders collect the metal in the form of coins or bars. Silver has historically traded at a fraction of the price of gold. Some traders track and trade the spread between gold and silver prices.

Platinum

Platinum is used to make jewelry and catalytic converters for cars. Investors purchase platinum for many of the same reasons they buy gold and silver.

Palladium

Palladium is used to make catalytic converters, dental equipment and electronics parts.

Base metals are used in a whole range of industrial and commercial applications including construction and manufacturing. Their widespread use in everyday items makes them essential commodities in global markets.

Popular base metals that is actively traded in the commodity market includes:

Copper
Lead
Nickel
Zinc
Aluminum
Tin

Energy

Energy commodities are probably the commodities whose trading has the greatest effect on traders and non-traders alike. Energy price affect everyone’s daily life and cost of living. Common energy commodities include the following:

Oil as a commodity is one of the foundations of the global economy, so its trading on the commodity market is followed not just by commodity traders, but also governments, economists, companies of all types and general public.

Gas is an extremely important commodity. Natural gas is the primary gas-based commodity that is traded on the commodity market.

Coal is traded actively on a number of commodity exchanges worldwide. Coal is a source of power generation for consumer and industrial usage.

Ethanol is gaining popularity due to biofuel demand.
All application of a modern life requires electricity. Almost all industrial output also requires electricity.

Agricultural Commodities

Agricultural commodities are easily classified into three major categories:
These includes:

1. Cereal Grains

Farmers grow these commodities as

  • a food source for humans,
  • a food source for animal, and
  • as a feedstock for fuels (in some cases)

Most common grain commodity are wheat, corn, oats, barley and rough rice.

2. Oilseeds

Farmers grow them for (a) the high oil content in their seeds and (b) the meal that remains after oil is extracted:

  • Canola
  • Cotton
  • Palm Oil
  • Soybeans

3. Other Soft Commodities

These mostly refers to other farmed products such as:

  • Cocoa
  • Coffee
  • Frozen Concentrated Orange Juice (FCOJ)
  • Sugar
  • Dairy such as Milk, Butter, Whey, Cheese

Meat commodities include:

1. Live animals raised for meat, hide, organs, bones and hooves and

2. Cuts of meat produced during the butchering of animals:

  • Feeder Cattle
  • Live Cattle
  • Lean Hogs

Some commodities have well-developed global markets, but don’t fit easily into the above categories:

  • Lumber
  • Rubber
  • Wool

Many of Agricultural commodities are not widely traded by global and speculative investors but mostly driven by actual market demand.

Environmental Commodities

In the last 30 years, man has become more health conscious. Communities around the world strive for healthy living and less pollution. As a result of this, a number of initiatives have been undertaken by governments and businesses with the aim of cutting pollution. Some of these programs especially those led by United Nation and European Union, such as efforts to reduce carbon emissions, have been implemented in such a way to allow the trading of commodities connected to them. In a short time, these newly traded environmental commodities have grown to become a popular and lucrative option for commodity brokers and businesses. As concern for the environment continues to grow, these opportunities can only increase.

Carbon Emissions There are two approaches to carbon emissions trading:

  • Cap and Trade
    Works by a ceiling being put on carbon emissions allowable in participating jurisdictions by participating companies. This results in a finite amount of possible carbon emissions, the rights to which can be traded. Companies can profit by obtaining the right to emit then not doing so, selling the emissions certificate on the commodity market. Likewise, companies involved in highly polluting industries can purchase certificates to allow them to legally pollute to a greater extent than they would otherwise be able to.
  • Carbon Offsets
    Allows the inclusion of companies that are not under an emissions cap. If a company pollutes at a level under this ceiling, it is eligible to create credits which can be traded as a commodity.
RECs, also known as renewable energy credits or green tags, are a new commodity based on the production of green energy. These certificates are given to companies as proof that electricity in units of one MWh (megawatt hour) or more have been produced by renewable means. Since these certificates can be traded, this means that companies that have not produced renewable energy can claim to have done so by purchasing renewable energy credits.

White certificates, also known as energy savings certificates or energy efficiency credits, work in a similar manner to renewable energy certificates, but dealing with gains in energy efficiency rather than the production of renewable energy.

Commodity Trading

There are more than 40 large international commodity exchanges in operation globally. While most exchanges deal with multiple commodities, each of them does specialize in certain types of commodities:

Some examples of these main international exchanges are:

The Chicago Mercantile Exchange (also known as CME). This particular exchange is one of the largest and has been in operation for over 100 years. It primarily trades in organic commodities, such as dairy products, meat, fertilizer and livestock. It also trades in financial instruments such as interest rates, stock indexes and Bitcoin (Cryptocurrency)

The New York Mercantile Exchange (NYMEX). This is one of the oldest national exchanges in the United States and trades mainly in petroleum and metal products.

The London Metal Exchange (LME). This is one of the largest, if not the largest, commodities exchange for the trading of base metals.

Tokyo Commodity Exchange (TOCOM). This exchange trades in all the commodities of Japan, including precious metals (gold, silver, platinum) and oil.

Commodity exchanges in developing countries such as India’s Multi Commodity Exchange, China’s Shanghai Futures Exchange and Brazil’s BM&F BOVESPA.

Similar to Forex trade, Commodity also provides a 24/7, 5 days per week Investment opportunity & Trading Window because of geographical and time zone difference across the globe. Commodity as an asset class of investment can be very complicated to a normal member because there are multiple factors to be considered for each type of commodities. Therefore, for the purpose of Financial Education, Financial.org will focus solely on Precious Metal, specifically Gold, as an asset class of investment for our members.

AVAILABLE FOR DOWNLOAD
AVAILABLE FOR DOWNLOAD
Download our official mobile apps today.
Financial.org is an educational platform. We DO NOT deal with securities and receive any financial benefits from Financial Products & Service Providers.
All Rights Reserved © 2016 - 2018