What Can be Traded in a Commodities Market?

Wheat, rice, natural gas and oils play a major part in the financial markets. In fact, they are one of the oldest trading assets, with a history that is rooted in hundreds of years. These assets evolved from the barter system to a sophisticated market setting with an advanced ecosystem of traders, brokers and funding sources.

Investing in commodities might look similar to stocks, bonds and other financial instruments. However, these products span various asset classes and trading options. Let’s review what can be traded in a commodities market and how you can get started.

Commodities are products that are extracted or harvested from the earth. Unlike stocks, bonds and currencies, centralised organisations have little control over these assets, and the only way to manage them is through agriculture. 

Trading commodities goes back to primitive times when tribes engaged in the barter system to exchange-traded commodities. The Chicago Board of Trade (CBOT) was created in 1848 to govern commodity trading in the United States. 

After many amendments and regulatory changes, the Commodity Futures Trading Commission was founded in 1974 to regulate the derivatives trading of commodities.

Today, the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX) are the most popular commodity market exchanges in the US, while the Intercontinental Exchange (ICE) and the London Metal Exchange (LME) are the leading marketplaces in Europe and the UK.

Any product that comes from a natural source, including cattle, can be classified as a commodity. Some of these products are traded for hedging purposes against other markets, such as stocks and currencies.

Gold is a key commodity that negatively correlates with the USD. This link comes from the historical gold backing and the fact that the gold is traded in the USD. Therefore, a stronger dollar means a lower demand for gold, and vice versa.

The list of commodities includes wheat, flour, coffee beans, sugar, and oils as examples of harvested products, while precious metals, energy oils and natural gas are sources extracted from the ground.

However, most commodities brokers categorise products as follows.

These assets include crude oil and natural gas, the most volatile commodities in 2023-2024, influenced by multiple geopolitical and technological factors.

Additionally, this sector covers heating oil, gasoline, coal, and fossil fuels. Energy commodities trading is largely popular, given the global importance of these assets.

Metals include gold, silver, and copper, which are used for hedging during market uncertainties. Commodities traders switch to gold and silver during inflation or economic turmoil, as precious metals tend to have a more stable value over time.

Gold is a highly volatile commodity, affected by unpredictable supply and demand rates and changes in USD monetary policy.

This market includes domestic animals and what can be produced, such as milk, meat, poultry, wool and leather. These are the most human-consumed commodities, with increasing growth potential.

Reports indicate that the meat market is expected to grow 14% by 2030 due to the increasing world population.

This sector includes harvested supplies such as rice, wheat, rye, cocoa, coffee, and sugar. Given its huge influence and seasonal volatility, it is one of the largest and most exciting markets.

Agricultural commodities liquidity changes according to the harvest seasons, technological advancements, climate changes, trade agreements, etc.

Initially, products were physically exchanged. For example, one party may receive 10 bushels of rice for a similar amount of cotton. However, with the introduction of commodities trading platforms, where investors are connected worldwide, physical commodities ownership became unfeasible.

Traders can potentially get hold of the traded goods. However, the most popular ways to trade in commodity markets are the following.

Spot commodity trading entails the real ownership of traded goods, where one party receives the subject commodity in exchange for money. This model remains today despite the existence of online trading systems. However, only limited commodities are physically traded.

Modern trading makes it impractical to transport herds of live cattle or millions of oil barrels. Therefore, most spot-traded commodities include value-dense assets like gold and silver.

Nevertheless, tangible ownership of gold and other commodities is associated with high fees due to extraction, transportation and storage.

Commodity derivatives trading is a popular way around the ownership hurdle. Most commodities trading software offers commodities derivatives contracts, including forwards, futures, and options, making the market highly accessible to investors around the world.

Trading CFDs allows traders to bet on the potential price of a given commodity, locking the contract’s price to be exchanged on the expiration date regardless of the price changes on the execution date.

Commodity futures contracts derive their market value from the spot trading price, or in other words, from the real-life value of the subject product. 

Prices change according to a wide range of factors, including political changes, climate changes, technological advancements, harvesting/breeding seasons and economic stability.

This approach pertains to stock trading, where investors buy shares of a company working in the agricultural, energy, or precious metals industry. For example, ExxonMobil and Chevron Corporation are oil and gas companies and buying their stocks entails trading in the commodity market. 

Commodity stock prices change according to the demand and supply of the underlying commodity. When the demand for oil increases, the oil price increases, and associated corporate stock values increase.

The market is expected to continue its unpredictable movement this year, highlighted by the highly-anticipated US presidential elections in Q4. These factors can drive commodities’ prices, like oil and gold, quite uncontrollably.

Commodities investors’ eyes are on gold and oil. The US elections can play a major role in the Federal Reserve’s interest rate, which has a negative correlation with gold. As rates increase, USD-based investments become more profitable and the demand for gold drops.

Other speculations involve copper, a core element of lithium batteries used for electric vehicles. EV manufacturers are expected to double their demand for copper as EV production is expected to grow yearly.

Nevertheless, political and economic shifts resulting from the administration’s change are expected to affect oil production and prices.

Commodities are harvested or extracted goods produced by natural resources and livestock. The main classification of what can be traded in a commodities market includes energy sources, metals, livestock, and agricultural products.

Traditionally, products were physically exchanged between participants in barter systems and trades. However, the growth of commodities trading platforms and the challenging logistics of transporting goods worldwide gave rise to commodity contract trading.

Commodities play a major role in financial markets, serving as a safe haven for other asset classes, such as gold, which is used for hedging against the USD during inflation and economic turmoil.