Comprehensive Overview of Commodity Trading: From Asset Allocation to Practical Operations

In the global asset allocation, commodity trading is as important as stocks, bonds, and foreign exchange. As an asset class characterized by high liquidity and deep ties to macroeconomic trends, its price fluctuations often accurately reflect the overall economic climate. For investors, understanding the logic and methods of commodity trading is crucial.

What is the essence of commodities?

The targets of commodity trading refer to large quantities of physical substances that enter circulation, are not in retail channels, and possess commodity attributes. The biggest difference from everyday goods lies in their “scale effect”: supply volume, demand volume, circulation, and inventory are all extremely large, typically situated at the upstream of the industrial chain.

Based on actual demand in commodity trading, they can be mainly divided into six categories:

Energy Sector includes crude oil, gasoline, fuel oil, natural gas, and electricity. Among these, crude oil is the largest in supply and demand scale, with the broadest downstream industry coverage (plastic packaging, clothing materials, fuel power, etc.), making it the “absolute protagonist” in commodity trading.

Industrial Metals Sector mainly involves copper, aluminum, lead, zinc, and iron ore. These metals are the lifeblood of manufacturing and are closely related to the global economic cycle.

Precious Metals Sector includes gold, silver, palladium, and platinum, named for their scarcity and high prices. They also have advantages such as corrosion resistance and easy preservation, inherently possessing monetary attributes and hedging functions.

Agricultural Products Sector includes globally cultivated crops like soybeans, corn, and wheat, with stable and large-scale demand.

Soft Commodities Sector includes sugar, cotton, coffee, etc., with supply heavily influenced by climate factors.

Livestock Sector includes pork, beef, and other protein commodities, with demand positively correlated with global consumption levels.

Additionally, due to the enormous trading volume of commodities mainly transported via sea routes, shipping indices are also included in the scope of commodity trading.

How to select investment targets among many varieties?

While there are many commodity varieties, not all are suitable for retail investors. Some commodities are limited by regional, temporal, or delivery conditions, restricting trading flexibility. For example, although electricity futures have huge supply and demand, their transmission scope is limited, and prices vary significantly by region, making them less suitable for broad global participation.

To determine whether a commodity is worth entering the market, consider the following six dimensions:

Liquidity Level: Sufficient trading volume indicates a well-established price discovery mechanism, with little room for manipulation. Mainstream varieties like crude oil, copper, and gold meet this condition and are suitable for beginners.

Global Pricing System: The variety is listed on multiple major global exchanges, facilitating participation by traders worldwide and forming a unified price reference. As a result, crude oil and gold are the top choices in commodity trading.

Ease of Storage and Transportation: The variety should be easy to store and transport over the long term, not overly affected by external factors like climate or geography. Metals and grains have clear advantages in this regard.

Standardization of Quality: Regardless of origin, the quality of the commodity is strictly controlled and standardized. This standardization is vital for commodity trading.

Stable Demand Base: Long-term and widespread global demand supports the variety. Energy (oil, natural gas) and food (wheat, soybeans) meet this criterion.

Fundamental Data Transparency: Key data such as supply, demand, and inventories are publicly available and transparent, allowing investors to judge price trends based on economic logic rather than speculation.

In summary, the most noteworthy varieties in commodity trading include: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton. They feature high liquidity, global pricing, and fundamental-driven characteristics.

Practical methods of commodity trading

Participation in commodity trading is diverse, including physical trade, industrial investment, and derivatives trading. For ordinary investors, derivatives are the most convenient entry point, with futures and options being the most common.

How Futures Contracts Work

Taking crude oil futures as an example, investors first need to identify the underlying (crude oil), then confirm the contract expiry month. Futures prices essentially reflect expectations of the spot price for a specific future month. When trading commodities, investors are essentially predicting the spot price at a certain time and making buy or sell decisions accordingly.

Dual Perspective: Fundamentals and Technicals

The long-term trend of commodity prices depends on macroeconomic conditions, supply, and demand changes. Deep analysis of these factors is called fundamental analysis, which determines the overall direction and magnitude of price movements. For example, during the COVID-19 pandemic in 2020, global central banks implemented quantitative easing, leading to inflation (“more money than goods”), which drove a broad rally in commodity prices.

Meanwhile, technical analysis (price patterns, indicators, etc.) helps to precisely time entry and exit points. Both should be used together: technical analysis requires confirmation from fundamentals to improve success rates, and fundamentals benefit from technical validation to assess trend sustainability. The key to successful commodity trading lies in integrating both approaches.

Core logic of commodity trading

Participating in commodity trading essentially involves re-pricing the global industrial chain. When the economic cycles of major economies resonate, the driving force for commodity trading is strongest, often creating the best trading opportunities.

Investors should focus on: prioritizing varieties with good liquidity, global pricing, and strong fundamental drivers; making strategic decisions based on macro trends; utilizing technical tools for refined operations; and continuously tracking supply-demand data and economic indicators. Only then can one achieve steady profits in the commodity trading market.