Commodity investing is the new buzz word with the global investors. The commodity markets have witnessed phenomenal growth in the past decade, and that has led to a shift in the investment from the stock market towards commodity investing.
Let’s check out the rules that one should remember to be successful when investing in commodities.
Principle of Supply & Demand: You need to know the production and consumption details & histories of the said commodity to understand which way the market is headed, so as to benefit in the trade. Before you invest, try to analyze the market trend. You should go through at least 3 to 5 years data to get a proper understanding of the market behavior. For example, new explorations or depleting mine stock will have a bearing on the market price, which should be kept in mind for commodity investing.
Nature: If you are involved in commodity investing, you must follow weather reports. Weather has a direct bearing on the production and supply of a commodity, and hence will be a vital factor in price determination. For example, if there is a sudden change in the weather, it may ruin or reduce the production of a commodity and the price will shoot. Alternatively, favorable weather will induce production and it will fetch lower prices in the market. So, keep a watch on the weather reports. Understanding forces of nature on commodities and their implications on the market will make the difference between a successful trader and unsuccessful trader.
Political Conditions: One of the most important factors in determining commodity investing is the political conditions of the region producing the commodity. The classic example for this can be the recent political disturbance in the Middle East countries. These are the countries producing and refining the majority of crude oil. The political disturbance has caused sharp increases in crude oil prices. The price per barrel crossed $110 per barrel at one time. So, it is best to keep your eyes open to get an insight in to the global politics and its effect on the commodity prices.
Economy: If your commodity investing portfolio includes metals like gold and silver, you need to know about the world economies. The prices of gold for example, will have a direct impact of the economies of both leading nations and developing countries. For a very long time, the price of gold was basically stagnant. But, the shaky global economy has pushed gold prices to new high. Prices that had remained steady at under $500 per ounce have more than doubled in less than 3 years. The reason for the dramatic increase is when the world economies are not doing well, investors turn to gold as safe haven. Investing in gold is also considered safe, especially when considering political instability. Also, there is a correlation between the gold prices and the oil prices, which cannot be ignored. Gold & silver also trade within similar multiples of value, so look for opportunities to acquire gold or silver below their respective multiple.