Commodity prices: complete guide to understanding the market

Commodities have been a part of human life since ancient times, and they continue to play a crucial role in today's economy. From precious metals to agricultural products, the prices of these essential goods have a significant impact on businesses and individuals around the world. But what factors influence commodity prices, and how can you trade them effectively? In this guide, we'll delve into the reasons behind commodity price fluctuations, highlight key things to take note of before trading, and reveal the top 3 commodities and soft commodities to watch in 2023. Whether you're a seasoned trader or a curious newcomer, read on to gain a deeper insight into the world of commodity prices.

Factors affecting commodity prices

There are several factors that affect commodity prices, including:

Supply and demand:

One of the most significant factors affecting commodity prices is the balance between supply and demand. When demand exceeds supply, prices tend to increase, while oversupply can lead to a decline in prices.

For example, if there's a shortage of oil due to reduced production or geopolitical conflicts, oil prices may go up.

Exchange rate fluctuations:

Commodity prices are often tied to the currency in which they are traded. Changes in exchange rates can affect commodity prices in a particular country or region, making them more or less expensive for buyers.

For example, if the US dollar strengthens against the Euro, it may cost more for Europeans to purchase commodities priced in dollars.

Geopolitical locations:

Geopolitical events like wars, political instability, and trade sanctions can significantly impact commodity prices. For instance, conflicts in the Middle East may lead to a rise in oil prices due to supply disruptions and fears of reduced output.

Economic growth:

Economic growth is also an essential factor in commodity prices. Strong economic growth often leads to increased demand for commodities, pushing up prices. In contrast, economic downturns may lead to a decrease in demand, leading to lower prices.

Mother nature:

Natural disasters like floods, hurricanes, droughts, and earthquakes may cause significant disruptions in commodity supply chains.

For example, a severe drought may damage crops and lead to reduced output, causing food prices to increase.

Transport and storage costs:

The cost of transporting and storing commodities can impact prices.

For example, if transportation costs increase due to fuel prices or a shortage of shipping containers, the prices of imported goods may rise.

Things to consider before trading commodities

1. Understand the commodity you are trading: Let's say you're interested in trading gold. Gold is considered a safe-haven asset, meaning it tends to perform well during times of economic uncertainty. However, gold prices can also be affected by factors such as the strength of the US dollar, inflation, and interest rates. Before trading gold, make sure you understand these factors and how they can impact the price of gold.
2. Know your risk tolerance: For example, if you have a low-risk tolerance, you may want to avoid trading volatile commodities like crude oil or natural gas, which can experience significant price swings. Instead, you may prefer to focus on less volatile commodities like agricultural products, such as corn or wheat.
3. Stay up-to-date on market news and events: Let's say you're interested in trading coffee. Coffee prices can be influenced by factors such as weather patterns, crop yields, and political instability in major coffee-producing countries like Brazil or Colombia. Stay up-to-date on news and events that could impact coffee prices, such as droughts or labor strikes.
4. Analyze market trends: For example, if you're interested in trading crude oil, you may want to analyze market trends to identify patterns or trends that could help inform your trading decisions. You could use technical analysis tools like charts and indicators to help identify key levels of support and resistance or potential entry and exit points.

Top 3 commodities in 2023

1. Gold:

The price of gold (at the time of writing) is $2,031 per ounce. That’s up 0.50% from the previous close of $2,021. The highest gold price recorded in the past 52 weeks is $2,040, whereas the lowest gold price within the same period is $1,814. In the last five years, the price of gold has increased by around 36%, while the SPX 500 has provided a total return of 60%.

• Gold is often regarded by investors as the ultimate safe-haven asset, as it may retain its value or appreciate during market downturns when the prices of stocks, bonds, and real estate decline sharply, attracting anxious investors.
• Incorporating gold in your investment portfolio can also provide diversification. By holding a mix of diverse assets, including gold, you can mitigate the risk of losses in case of varying returns.
• There are several ways to invest in gold, each with its own advantages and disadvantages: You could for instance invest in gold bars, gold coins, gold jewelry, gold stocks, gold futures contracts and gold funds.
• It's important to note that gold's price can experience significant fluctuations, which makes it an investment that may not be entirely stable.

Related: Gold price trends: is now the time to buy or sell?

2. Iron ore:

The price of Iron ore (at the time of writing) is $107.40 per dry metric ton. That’s up 3.72% from the previous close of $103.55. The highest Iron ore price recorded in the past 52 weeks is $145.88, whereas the lowest Iron ore price within the same period is $80.03.

• Experts claim that the price of iron ore is currently benefiting from China's "stronger-than-expected" economic recovery after prolonged COVID lockdowns. There is a belief among some that prices may receive support in the near future due to market optimism and an improving demand outlook.
• However, it's also important to note that it may be a risky investment since the demand outlook of Iron ore in other developed markets such as the US and EU (European Union) is weak due to the slowing global growth.

3. Lithium:

The price of Lithium as at the time of this writing is $192500 per ton. That’s up 5.48% from the previous close of $182,500.

• Lithium is a versatile metal with various industrial and commercial applications. However, its primary use is in the production of rechargeable batteries, particularly for electric vehicles, smartphones, laptops, and other portable electronic devices.
• Despite a decline in lithium prices from their recent peak, some industry experts maintain their optimism regarding the future prospects of this essential battery material.
• According to experts, electric vehicle demand will account for 90% of lithium consumption by 2030.

Top 3 soft commodities in 2023

Soft commodities are commodities that are grown rather than extracted from the earth. They are typically agricultural products that are traded on commodity markets. So what are the top 3 soft commodities in 2023?

1. Sugar:

At the time of writing, the price of sugar stands at around $26.18. The world sugar futures experienced a surge to a multi-year high in Q1 2023.

• Sugar, which is the primary component of ethanol in Brazil, is produced and exported by Brazil, the world's largest free-market sugarcane producer and exporter.
• Presently, nearby sugar futures are approaching a multi-year high and this may be a commodity worth looking into in 2023.

2. Coffee:

During Q1 of 2023, coffee futures witnessed a slight rise. The ICE Arabica coffee futures increased by 1.91% and concluded the quarter at $170. In the initial two weeks of Q2, the price of coffee futures continued to increase. At the time of writing, the price of coffee stands at around $186.

3. Cocoa:

In Q1 of 2023, cocoa recorded a significant increase in percentage. The cocoa futures surged on the positive side, marking a 12.81% rise for the quarter and concluding at $2,933 per ton. At the time of writing, the price of cocoa is still above $2970 and is being tested at the $3000 per ton level.

• Cocoa is at a crucial price level, and if the recent rally continues, it may lead to the start of a new bull market for the primary component in chocolate confectionery goods.

Recommended: Soft commodities and all you need to know about them

Trade commodities with Skilling

Skilling is a regulated online trading platform that allows traders to trade a variety of financial instruments, including commodities, such as oil, gold, silver, and agricultural products, like coffee, cocoa, and wheat. Here are the steps to trade commodities with Skilling:

1. Open an account: To start trading with Skilling, you need to register for an account on our website. The registration process is straightforward and takes only a few minutes to complete.
2. Fund your account: Once your account is verified, you need to deposit funds to start trading. Skilling accepts various payment methods, including credit/debit cards, bank transfers, and e-wallets.
3. Choose your commodity: Skilling provides a wide range of commodities to trade. Choose the commodity you want to trade and decide whether you want to buy or sell it.
4. Place your order: Once you have selected your commodity, enter the order details, such as the trade size, stop loss, and take profit levels.
5. Monitor your trade: After placing the trade, monitor your position and adjust your orders if necessary. You can track your trades on the Skilling platform or through our mobile app.
6. Close your trade: When you decide to close your position, you can do so at any time, and your profits or losses will be calculated based on the difference between the opening and closing prices.

For example, let's say you want to trade gold with Skilling. The current market price of gold is $1,800 per ounce, and you believe that the price will rise. You decide to buy one contract of gold at the current market price. If the price of gold goes up to $1,900 per ounce, you could close your position and make a profit of $100. Conversely, if the price of gold falls to $1,700 per ounce, you could close your position and incur a loss of $100.

Conclusion

Understanding the commodities market can be challenging, but with the right knowledge, tools, and resources, traders could capitalize on the opportunities presented by this exciting market.

So, whether you are a seasoned trader or a beginner, take the time to learn about commodities and the factors that affect their prices. With the right mindset and approach, the commodities market could offer endless possibilities.

If you're interested in trading commodities, consider doing further research, seeking guidance from a financial advisor, and exploring reputable online trading platforms like Skilling. Remember, trading always involves risks, so be sure to only invest what you can afford to lose.

Past performance does not guarantee or predict future performance. This article is offered for general information purposes only and does not constitute investment advice.