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What is Commodities Trading?
Commodity trading involves the buying and selling of raw materials on a number of exchanges and is normally traded as a futures contract. Natural resources can include physical assets such as cotton, wheat, oil, and precious metals. The world economy is dependent on these natural resources being traded on exchanges that specialise in commodity trading.
There are a variety of complex factors which affect the production and consumption of commodities including politics, supply and demand, economic events, weather, natural disasters, and also the price of the USD as commodities are generally priced in the US currency. Commodity prices tend to establish persistent trends that can last from 5 to 10 years creating opportunities for trading commodities across all time frames.
Trading Oil: Brent & WTI
The oil market is diverse with various prices quoted for crude oil depending on the location, quality and properties. The most commonly traded oil contracts are Brent (Brent Sweet Light Crude) and WTI (West Texas Intermediate), which are the two global benchmarks for oil trading.
Brent crude oil is extracted from the North Sea, and WTI is extracted in North America. WTI is known to be the best quality from the oil benchmarks as it is used for diesel fuel. However, Brent is recognised for its high-quality gasoline production. There are other factors that also need to be considered when determining the price of the two benchmarks, including transportation fees, amount of production and the availability of storage facilities.
For many years, the prices of the two were only a few dollars apart. However, over the last decade, Brent has surged ahead and now trades $5 to $10 higher than WTI.
Trading Metals: Gold & Silver
Gold has always been the most coveted precious metals throughout history, both for its status and monetary value. It has always had its links to currency, now traders tend to use gold as a safe haven asset in their trading portfolio, in times where there is a financial crisis.
In a similar way to Gold, Silver has always been linked to currency and even though it doesn't share the same status as Gold there are other reasons why traders turn to this particular precious metal. There is a lower cost to enter and open a position in the silver market compared to Gold and is considered to be a relatively volatile market making it attractive to traders who may want to optimise their chance of bigger returns. However, it is important to remember that all trading involves risk.