Inflation Trading seems to be the only song on the hymn sheet that is keeping central bank officials awake at night, senior corporate directors concerned, and investors out of tune. For instance, according to the US labor department, the 0.6% increase in January 2022 consumer prices sent the inflation flying to 7.5% over the past 12 months, the worst hike since 1982.
Financial market benchmarks are sending mixed signals as they are whipsawed by the double whammy of rising consumer prices and uncertainty in monetary policies. The jumpy nature of equities and the instabilities in currency markets are pushing investors into hideouts such as bonds and commodities. The appetite for risk is expectedly on a downtrend as capital preservation and liquidity preference take center stage.
Inflation is a macroeconomic problem and there is nothing useful you can do as an individual investor to cool down the economy. However, a few strategies can save your fingers from burning. For instance, knowing how to trade commodities such as precious and industrial metals, energy, and agricultural commodities, can give you a relatively stable landing even in a volatile market.
Stick around to learn more on what commodities to look out for, how to take positions, and trading opportunities that can boost or protect your earnings.
Generally, commodities are excellent stores of value in an inflationary environment. The three main motives any investor would want to achieve through commodity trading are:
- Inflation protection: Compared to equities and debt instruments, commodities tend to react differently to changing economic fundamentals such as inflation and interest rates. For instance, as consumer price levels increase, commodity prices also increase thus giving you a hedge against inflation.
- Diversification: There is a positive correlation between commodities and inflation. This means your portfolio risk will be much lower as the assets pull in different directions.
- Return potential: Investing in a broad set of commodities gives you an opportunity to beat the market when inflation rises.
Whether you want a broad-based exposure to commodities or a couple of quick picks, the first thing to consider are the specific commodities to go for. There are three categories of commodities you should expect:
Precious and Industrial Metals
This category includes metals such as gold, silver, nickel, platinum, copper, tin, palladium, zinc, and aluminum.
The commodities making up the energies category include but are not limited to crude oil (WTI crude and Brent crude), natural gas, and refined products such as gasoline, heating oil, kerosene, and gasoil.
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Agricultural commodities include grains such as corn, wheat, oats, soybean, rough rice, soybean, canola, and softs like cocoa, coffee, sugar, orange, cotton, wool, lumber, rubber, and ethanol. You’ll also find exchanges such as the Chicago Mercantile Exchange (CME) listing livestock commodities like live cattle, feeder cattle, and lean hogs.
Having said that, don’t let the wide range of commodities overwhelm you. Whether you are a beginner or experienced trader, taking positions in solid commodities like gold, silver, natural gas, Brent and WTI crude can give you a quick footing.
Now that you know why you should consider commodities and the few assets that you can begin with, you should now shift gears to how to trade those assets. Commodity trading is not any different from trading in financial assets- bonds and equities. Buyers and sellers still converge to exchange assets, only that commodity trading has two sides to it- current(spot) and future.
Spot Commodity Trading
This trading is based on the current prevailing prices of commodities. You open a position instantly at the spot price and depending on whether the prices go in your favor, you may exit your position at a profit.
Trading commodity futures means you agree with the seller to exchange the commodity at a set price and date in the future. Next generation trading platforms such as Prime XBT give you quick and easy access to global commodities marketplaces where instead of physically handling and storing the underlying commodities, you benefit from commodity contract for differences (CFD) trades which are digital in nature.
In CFD trading, when the futures contract matures or expires, the contract is rolled over to the next month and you get credited or debited with the difference depending on the price direction relative to your position.
As a platform Prime XBT provides you with customizable charting software populated with a huge collection of technical indicators. This gives you the opportunity to trade long, short, and execute orders instantly while profiting from them.
Margin trading allows you to use less capital to execute large trades. The platform provider will ask you to deposit a percentage of the value of your position to allow you to trade. For instance, a 10% margin requirement means for a trade of $1,000, you’ll only need to deposit $100. The rest is leverage from the broker.
If the position goes your way, you will receive higher profits. However, it is also important to note that if the position goes the other way, your losses will be magnified as well.
Since leverage allows you to open larger positions with little capital, you can spread your capital over several commodity positions hence diversifying your portfolio and lowering the overall risk.
Whether you trade long or short, commodity trading opens the trading universe to lots of possibilities. With the right strategies, market price monitoring, and expert advice, you can turn a profit and grow your capital over time. Simply, sign up for a trading account, fund your account, and start trading your preferred commodities right away.