What is Commodity? Investors, especially those who are new to the investment markets, hear this word often. Some investors may face a brief confusion at this point. They may also mistake the investment market as a complex market full of terms. We have prepared an article on what commodities mean and commodity investment for experienced investors.
What Is Commodity?
Different definitions can be made about what a commodity is. All of the goods that are subject to trade in the economy can be called a commodity. If we define it in a broader way, all products whose value is determined by consumers and investors, which are subject to commerce, and which can be traded as intermediates for the production of self-contained products, are called commodities. For example, metals such as gold, silver, copper, aluminium and iron are commodities that are widely known in the market and used both for investment and production processes. In addition, fuels such as oil, natural gas, coal; food products such as soybeans, corn, wheat, cocoa and sugar are also among those frequently traded on commodity exchanges. Cryptocurrencies such as bitcoin, which have emerged recently, are also seen as commodities by some economists.
It also has a special significance for countries. What does commodity mean for countries? It means a measure of the wealth of countries. For example, if we give an example of countries where oil is abundant and extracted, the issue can be understood more easily. Or the abundance of reserves of mines such as gold and natural gas is important for the wealth of the country. That’s why commodities have strategic value.
What Does Commodity Exchange Mean?
Commodity exchanges are exchanges where all these products are traded, bought and sold.
There are examples of important and large commodity exchanges such as the London Metal Exchange, Eurex, Powernext, the European Energy Derivatives Exchange, the Tokyo Commodity Exchange, the Johannesburg Stock Exchange.
When we go down to the history of commodity exchanges, we see the Great Depression that emerged in the USA. During the Great Depression, the prices of many products underwent significant changes. After the impact of the crisis, with the changes in commodity prices, investors realized that they could make money through buying and selling by investing in commodities. Then we see the exchanges where transactions can be made. Later, they evolved towards a situation where small investors can also enter the market and invest.
What Does a Commodity Mean for the Forex Market?
Commodities are also frequently traded in the Forex market. In particular, products such as gold, oil, silver, natural gas have a large volume in the forex market. Investors in the Forex market take advantage of this volume and try to profit from the change in prices. In addition, thanks to the leverage and low spreads offered in the forex market, commodity investment becomes more reasonable compared to other markets. In Forex, it is possible to profit not only from the rise but also from the fall of the prices. For this reason, an investor who predicts that oil prices will decrease can make a profit by trading in the downward direction.
For example, let’s say you predict oil prices will fall. Let’s assume that you are trading 1 lot in the direction of decline when the oil prices are at the level of $49.20. For petroleum commodities, 1 lot corresponds to 1000 barrels. If the prices drop to the $47.30 level, you would make a profit of 1.90 pips. Of course, that was your profit for 1 barrel. For 1 lot trade, you have 1.90 pips x 1000 barrels = $1900 profit. For this, you need 49.20 × 1000 = $49200. However, if you take advantage of the leverage offered by the forex market, this is not necessary. If you use 100 leverage, it is possible to make a profit of $1900 in this transaction with 49,200 / 100 = $492.
However, it should be noted that the higher the leverage, the higher the risk.
The gold commodity is frequently traded in the forex market. We can say that gold is the most traded product, even among the public, by purchasing it from jewellers. In the Forex market, it is generally traded with the symbol XAU. AU denotes the gold symbol. X is used to denote precious metals. Likewise, silver appears with the symbol XAG. You can also read my post about investments on what is the best investment tool and how to choose it.
Gold, silver, oil, natural gas are the most frequently traded and volatile commodities in the forex market. However, the market is not limited to these, of course. Products such as soybeans, sugar, cocoa, kerosene, heating oil, beef are also encountered in the forex market. However, it should be noted that their volume and mobility are low.