Trading commodities takes a firm understanding of why prices move and when they are likely to move. Commodities like gold and oil, fluctuate for several reasons. These include supply and demand, the movements of the US dollar and technical forces. There are also a number of ways you can trade commodities including through futures markets as well as contracts for differences.
The Most Liquid Commodities
Gold and oil are the most liquid commodities. These products trade around the clock, 24-hours a day. Gold is traded like a currency, while oil is considered the most actively traded commodity. Since both gold and oil are priced in US dollars, they are both subject to changes when the value of the US dollar is altered. Gold trades just like a currency pair. Gold even has an interest rate curve, similar to the euro or the yen. When the value of the US dollar increases against most major currencies, it is also likely to put downward pressure on gold prices. You can trade gold around the clock using a trading app.
Oil is also quoted in dollars. While there are some grades of oil that are quoted in other currencies, the two most liquid benchmarks, West Texas Intermediate (WTI) and Brent Crude oil, are quoted in US dollars. WTI is a type of oil that reflects the price of crude oil in Cushing Oklahoma. Brent crude oil is priced against oil that is delivered in the UK.
Supply and Demand Drive Prices
While the supply and demand of oil are more easily captured then gold, these macro forces help drive these commodities. The demand for oil comes in products that are used by consumers. This includes heating oil, diesel fuel, jet fuel and gasoline. The demand is captured by government or private agencies such as the Energy Information Administration, which is part of the US Department of Energy or the American Petroleum Institute. OPEC also provides data on supply and demand. The International Energy Agency is also a private agency that provides supply and demand related information. The world gold council is an agency that provides supply and demand figures for gold. When the global economy is strong, the demand for oil will increase as consumers drive more and increase gasoline demand. The reverse tends to occur when the global economy is weak.
Using Gold and Oil as an Inflation Hedge
Gold and oil prices tend to rise as inflation expectations rise. Energy such as oil, usually is a factor in creating inflation. When wages rise, people are able to afford higher gasoline prices, which helps drive inflation. To hedge against higher inflation levels, portfolio managers tend to purchase gold as it is a hard asset that increases in value relative to fixed assets like bonds that decline in value when inflation starts to rise.
Different Ways to Trade Gold and Oil
There are several ways to trade gold and oil. Once of the most efficient ways is via a contract for difference. This is a security that tracks the movements in gold and oil, but does not require that you post all the capital needed to physically buy oil or gold. You can also use a futures contract to purchase gold or oil. Gold and oil are the most liquid commodities but before you begin to trade, you should be aware of the factors that drive prices.