The commodities market is a crucial component of the global economy. This market includes a wide range of products, from precious metals and energy to agricultural products.
The dynamics of this market have a significant impact on economies around the world.
How has the commodities market evolved in recent years?
According to the World Bank’s Commodity Markets Outlook Reportenergy prices increased significantly in the third quarter of 2021 and are expected to remain high through 2022. Energy prices in 2021 would be, on average, 80% higher than the previous year.
Prices for some commodities reached or surpassed levels not seen since the 2011 spike. For example, natural gas and coal prices rose to record highs amid supply constraints and a rebound in electricity demand.
What are the current trends in the commodities market?
- Rising energy prices: Energy prices this year are expected to increase, on average, by more than one-third compared to 2020 values..
- Rising metal pricesMetal prices are expected to increase by 30%.
- Increase in agricultural commodity pricesAgricultural commodity prices will increase by almost 14%.
How does the commodities market affect the global economy?
The commodity market has a significant impact on the global economy. Changes in commodity prices can affect inflation, economic growth and a country’s trade balance.
For example, higher energy prices can increase global inflationary pressures and could increase economic growth in energy-exporting countries to the detriment of energy-importing countries.
How can I invest in commodities?
There are several ways to invest in commodities, here are some of the most common ones:
- CFDsContracts for Difference: Contracts for Difference are a type of contract between two parties to exchange the difference between the entry price and the exit price of the underlying asset.
- OptionsOptions are contracts that grant the right, but not the obligation, to buy or sell an asset at a given price on a future date.
- FuturesFutures contracts are legal agreements to buy or sell a commodity at a future date at a predetermined price.
- ETFsExchange Traded Funds: Exchange Traded Funds are investment funds that are traded on stock exchanges, just like individual stocks.
- Shares of companies in the sectorYou can invest in companies involved in the production or extraction of raw materials, such as oil or mining companies.
What are the risks of investing in commodities?
Investing in commodities can be lucrative, but it also carries several risks that you should consider:
- Market volatilityCommodities are some of the most volatile assets in the markets. Prices can fluctuate rapidly due to changes in supply and demand.
- Geopolitical riskCommodities: Investing in commodities carries an associated geopolitical risk as these natural resources are located on different continents and jurisdiction over commodities rests with the governments of each country, international companies, and many other entities. Political tensions in a commodity-producing region can lead to a decrease in the supply of that commodity and thus increase its price.
- Speculative riskAs in the equity or fixed income markets, there are also speculators in the commodities markets who invest in certain commodities to achieve short-term gains by speculating whether the price of a commodity will go up or down.
- Regulatory riskRegulatory risk: Government regulations may affect the price and availability of certain raw materials.
- Climatic eventsSome commodities (e.g. agricultural commodities) are also influenced by climatic events.
