Investing in commodities - motives and benefits.

One of the earliest types of investment is commodity trade, which started as a barter, or the trading of goods or materials. The emergence of clay tokens from Mesopotamia, where the Sumerians used them to calculate the number of goats that would be delivered on a specific day, marks the beginning of futures contracts.

When making investments in raw materials during the Middle Ages, farmers sought to guarantee a future sale of their harvests. The buyer was certain that he would receive the products in the specified quantity at the predetermined price thanks to this method of obtaining future sales at a predetermined price.

However, in 1848, the Chicago Board of Trade was founded. It is currently one of the marketplaces that traders, institutions, and speculators frequent the most.

What does investing in raw materials entail?

Investing in raw material commodities is a form of trading that involves speculation and investment on the commodity markets. Raw material commodities can be anything from commodities like wheat, oil, gold, silver as well as some agricultural products. The goal of investing in commodities is to generate profits by accurately predicting whether prices will move in either an increasing or decreasing direction.

This kind of trading provides investors with opportunities for large potential gains, but also carries with it risks due to fluctuating prices. Investors look for signals on whether to buy or sell commodities which could arise from political issues, natural disasters or similar market-influencing events.

The primary distinction between raw materials and other products is one of standardisation. This means that regardless of who produced the raw material or where it was produced, each unit of the finished product will have roughly the same quality and cost. Therefore, whether cotton is produced in Vietnam, Brazil, or India, its price will be the same at 1,000 grams.

Forms of investment

Here are the most well-liked investment options available if you wish to start making investments in raw materials:

Types of commodities:

When investing in commodities, it is useful to know that they are classified in two groups: hard commodities and soft commodities.

Hard commodities are mostly those that are extracted (such as gold, oil, etc), while soft commodities are agricultural or animal goods (wheat, cotton, soybean, sugar etc).

The two above groups are also broken down further into:

1. Agricultural products: this category covers unprocessed goods like sugar, soya, coffee beans, etc.
2. Energy items include gasoline, electricity, and oils like WTI or Brent.
3. Metals: This category contains both base metals like copper as well as precious metals like gold, silver, and platinum.
4. Livestock Products: These include various meat products, as well as pig and cattle guts.

Top commodities traded in history

Throughout history, top commodities have been extremely important factors in driving economies and commerce. Gold, silver and oil top the list of famous commodities that have been commonly traded for centuries. Gold has had its place as currency as far back as ancient civilizations, with large deposits found all over the world.

Silver is another mineral that has formed the backbone of some societies' economies and continues to be widely used today in jewellery, coins and even electronics. Oil has also transformed how worlds operate, it being a major source of fuel and motor energy. In addition to these three major top commodities, cotton, wheat and livestock have all featured abundantly in trading activities down the ages.

It is clear then, that top commodities such as gold, silver and oil have had a powerful impact on the fate of entire nations throughout history until present day.

Let’s explore these in more detail:

Benefits of investing in commodities

Being unique assets that won't mimic the development of any index is the main benefit of investing in raw materials. Another benefit is the wide range of raw materials that can be used to operate, even within the same market.

Volatility is the biggest drawback of investing in commodities. Due to the frequent price fluctuations, commodities make for risky investments. Another drawback to consider is that because of the market's volatility, speculative fluctuations are significantly more pronounced than on other markets.

Except for gold, which, due to its stability as an investment value, is frequently utilized even as a defensive position during financial crises, often referred to as a safe haven.

A safe haven is an investment that is designed to protect an individual or institution from market volatility. These generally come in two forms:

• Physical safe havens such as gold or other precious metals, which can often be bought and sold as a physical asset
• And trading safe havens such as currency or bonds, which are investments that do not fluctuate with the stock market.

Both types of safe havens are good for hedging against market downturns and protecting an individual’s assets from economic turmoil. In times of volatility, safe havens provide some security from the risk of losses caused by changing markets and the instability of stocks.

Motives to invest in commodities

Commodities investment can be done for a number of reasons, but there are three key ones that make it an appealing proposition for traders. These include the expanding global population, protecting against inflation, and portfolio diversification.

As a final note, it’s also important to consider the role leverage plays in commodity trading as it allows traders to increase their exposure and potential gains with the same capital.

However, the increased risk it brings comes with a higher potential for losses. It's important that commodity traders have a thorough understanding of both its benefits and drawbacks to maximise their trading results. Leverage also affects commodity spreads and swaps, meaning it's essential to have knowledge of these instruments when making speculative trades.

Ultimately, leverage can be an invaluable tool when deployed correctly, but knowing its pitfalls is just as important as leveraging its power.