Amanda’s Note: Have you ever considered commodities trading? I’ve invited this post to talk a bit about the subject.
Commodities trading involves determining the future direction of intermediate products. Most commodities fit into either energy, base metals, precious metal or softs. Energy includes petroleum, natural gas and coal. Base metal’s traders focus on copper, aluminum, zinc and tin. Precious metals trades usually focus on gold, silver and palladium, while soft traders zero in on corn, soybeans, wheat and coffee.
Commodity trading is fast paced, and is driven by a combination of fundamental and technical analysis. The fundamentals of commodity trading are usually based on supply and demand. There are a number of specific government organization that provide information about commodities that can be used to trade.
For example every Wednesday the Department of Energy provides an estimate of energy inventories. The report is released at 10:30 AM ET, and shows commodity traders any changes to crude oil, gasoline or distillate inventories. These data points help a commodity trader determine if current supply is above or below demand. If inventories are building during a period when they should be declining then supply is outpacing demand. The report also tells traders above import into the United States and exports of distillates and gasoline. Finally, the report also tells commodity traders what the present demand for products, such as distillates and gasoline.
On a weekly basis the Department of Energy also puts out an estimate of natural gas supplies. The number that is released shows natural gas in storage, and also reflects the supply and demand dynamic of natural gas.
There is also weekly data that is released by the United States Department of Agriculture that influences the movements of corn, soybeans and Wheat. The number that are released on a weekly basis reflect the yield of crops as well as the acreage that is planted. These number will move the market when they are released and are very pertinent to a commodity trader.
Precious metals traders are generally more focused on currencies and interest rates than the supply and demand for gold and silver. This is for two reasons. The first is that most commodities are priced in U.S. dollars. As the value of the dollar increases relative to another currency, the price of gold or silver will change. For example, if the exchange rate between the U.S. dollar and the Euro moves in favor of the dollar, the price of gold in Euro’s increases. The second reason is that precious metals trade like currencies and have their own interest rate which will move along with other sovereign interest rates. The gold forward rate will help drive the changes to gold prices as it fluctuates relative to U.S. interest rates.
Commodity traders trade base metals by evaluating supply and demand. The London Metals exchange reports data on supplies on a weekly basis. This helps traders determine the future direction of base metals.
Regardless of how you trade commodities, it is important to know the way many traders evaluate futures movements in commodity prices.