Richard Dennis started commodity trading with only $300 and ended up making more than $150 million in just few years. He is considered to be a great commodity trader. Do you know about the great Turtle Trading Experiment? Richard and his trading partner as well as close friend Bill Eckhart conducted this experiment to show any one even novices can trade commodities and become millionaires like them. Commodity trading presents both challenges and opportunities. Commodities markets are both broad and deep. In the beginning chances are you will be overwhelmed by the number of tradable commodities to choose from. There are 32 tradable commodities to be exact. How are you going to decide that you want to trade gold or crude oil, natural gas or frozen concentrated orange juice, soybeans or aluminum, silver or palladium? What about corn, feeder, cattle or copper?
Do you remember the sudden spike in oil prices from around $60 to $145 during the summer of 2008? If the oil prices go up, the central banks are forced to raise the interest rates to fight inflation. Much of what happens in the world-from your home mortgage loan to your job depends on the global oil prices and the interest rates. This can happen again. Just because the global economy has gone into a recession, the demand for oil has decreased. But once the global economy starts to expand again, oil demand will again go up.
So how do you decide which commodity to trade? How do you know what is the best way to invest in commodities? Should you trade commodities futures, or get stocks of companies dealing with commodities like Exxon Mobil or Starbucks or invest in ETFs or commodities mutual funds. Just getting started in commodity trading can be daunting. A lot of investors think that commodity trading is synonymous with futures trading as there are many commodity futures contracts that are traded on various exchanges. However, you should know that futures trading is only one way of getting involved in commodity trading.
Many analysts are of the opinion with the end of global recession the prices of most of the commodities will skyrocket. Oil, gold, copper and silver all hit an all time high between 2001 and 2006. Many other commodities reached an oil time high. The prices are down now somewhat due to the global recession. Do you know that the 21st century is the century of commodity trading? Due to some fundamental factors like the global population explosion, urbanization and the industrialization of the emerging market economies like Brazil, India and China (BRIC), a long term cyclical bull market in commodities is expected during the first part of the 21st century.
However, it doesnt mean that there will be no minor downturns like that in the present due to the recession. Commodities are poised for a rally that will last long in the 21st century. Gold prices are still going higher and higher. Do you want to ride the trend in the gold market? Countries like China, India, Russia etc are buying gold in the open markets that is driving the gold prices higher and higher. Wealthy investors are taking refuge in gold due to the financial crisis and weakness of US Dollar. You maybe already late!
Commodity trading can be fun and profitable if done well. A successful speculator has to keep an eye on what is happening in many markets around the world, it does not matter whether you are trading gold, soybeans or bonds. However, commodity trading is never easy. Its not meant to be. We must learn to trade like mercenaries, trading not on the bull side or the bear side but on the right side. Commodity trading is certainly not for everyone. So what is the right vehicle for commodity trading? It depends on what commodity you want to invest in.
Commodity futures: The physical commodities still are the major components of the futures market although many new futures products have been introduced. The futures markets and commodities were synonymous because the futures markets were all about those physical products that you could touch, taste, grow, mine, consume or deliver until 1970s. Commodity markets are so broad and diversified; they make you confused in the start. There are so many sectors in the commodity markets. Commodities can be broken down into several categories like metals, energy, grains, livestock, food and fiber. Metals include copper, gold, palladium, platinum, and silver just like other segments of the futures markets.
The energy futures market has become one of the most important gauges of the world economic and political developments. Until 1978 when the New York Mercantile Exchange (NYMEX) launched trading in heating oil, Futures on Energy did not begin trading. Crude oil futures began trading in 1983. Natural gas futures contracts also get traded on NYMEX. Similarly you can trade copper, silver, platinum futures contracts on different exchanges. Now gold is a very important precious metal. Gold futures contracts trade on NYMEX! Chicago Board of Trade (CBOT) offers mini gold futures contract with lower margin requirements for retail investors.
Like all commodities markets, meat markets also have a number of futures contracts like the feeder cattle contract, lean hog futures contracts, pork bellies contracts. CME offers milk futures contracts as well as the live cattle contract. You will also find coffee sugar, orange juice and coca futures contracts traded on various exchanges. Similarly you can find many futures contract that cater to the agricultural markets like soybeans futures contracts, corn futures contracts. Equity markets also offer access to commodity trading in an indirect manner although the futures markets offer the most direct way to invest in commodity trading. You can invest in companies that specialize in the production, transformation and distribution of these commodities.
Instead of directing trading energy futures contracts you can invest in energy stocks. For example by investing in the diversified mining companies like BHP BILLITON or electric utilities or the integrated energy companies like EXXON MOBIL will still allow you to profit from the commodities boom. You can also invest in the Master Limited Partnerships (MLPs) that invest in energy infrastructure like the oil pipelines and natural gas storage facilities. You can also invest in commodities mutual funds and exchange traded funds that deal with the commodities sector.
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