Commodities Futures Trading
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Before venturing into high-risk commodities futures trading, novice investors will need the services of an experienced commodity trading advisor skilled at forecasting fluctuating values. Commodities are things that come from nature, and nature can be unpredictable. Agricultural products, such as wheat, corn, oil, and livestock are all dependent upon regional and global climate changes, the availability and cost of labor, and to a great degree, technology. The law of supply and demand also has a direct effect on the price of commodities. When products are in abundant supply, their cost goes down; but in times of shortage, the demand increases and so does the price.
Commodities futures trading involves being able to forecast supply and demand, analyze the effect that supplies will have on the global stock market, and predict how stocks will perform in the future. Investors trade in futures contracts, or promises to buy or sell a specific product at a certain price with the expectation of making a profit on a date yet to come. And no, traders don't have to be clairvoyant or use a crystal ball to forecast futures, but they do need to study market trends. "The Pharisees also with the Sadducees came, and tempting desired Him that He would shew them a sign from heaven. He answered and said unto them, When it is evening, ye say, It will be fair weather: for the sky is red. And in the morning, It will be foul weather to day: for the sky is red and lowring. O ye hypocrites, ye can discern the face of the sky; but can ye not discern the signs of the times?" (Matthew 16:1-3).
Commodities futures trading requires vigilant research and keeping abreast of global climatic, economic, and political indicators which may adversely affect the supply and demand for goods. But the availability and demand for agricultural products is largely dependent upon the weather. Because these products are affected by climate changes, such as drought, flooding, or violent storms which can devastate crops; their price can fluctuate wildly -- within a day or a week. When a long hot summer drought robs corn fields of precious water, the impact is felt not only at the supermarket as corn supplies go down, but also in the commodities markets in New York and Chicago, as the demand and price for corn escalate. Similarly, the spread of mad cow disease in animals imported from England can lead to shortages as livestock is destroyed to prevent its spread. As a consequence, beef shortages increase demand and prices skyrocket for prime rib.
Perhaps, two of the most influential commodities worldwide are oil and gold. When the cost of a barrel of foreign crude oil topped $100, Americans paid through the nose at the gas pumps; and fuel costs threatened to reach a whopping $5 per gallon nationwide. Foreign and domestic oil companies realized huge profits, but at the expense of the American taxpayer. For investors engaged in commodities futures trading, high-ticket metals have proven to yield consistently high returns. Precious metals like gold, platinum and silver are also "hot" commodities. They tend to hold their value, which increases as the value of the U.S. dollar decreases. The demand for precious metals, especially gold, increases because of its liquidity. Unlike stocks and bonds and agricultural commodities, gold is like money in the bank; and can always be traded for a source of ready cash. Gold had reached an all-time high of nearly $1,000 per troy ounce, but has dropped in price in recent months. In spite of the decrease in price, the outlook for gold futures continues to be extremely bright.
In commodities futures trading, investors and experienced traders carefully study consumer buying trends which are indicative of demand; along with the past performance of certain products. By researching how stocks performed in past years, traders can make an informed choice about which products to buy or sell, in what amounts and during which period of time. Experienced traders want to buy when markets indicate a decreased demand for a product and sell stock in that particular commodity when prices peak. Profits can be realized when investors buy low and sell high. However, due to the volatility of the market with prices fluctuating wildly on a daily basis, it takes a keen eye to discern what stocks will do in a single day, a week, or even a month.
Because of so many uncertain variables, commodities futures trading is not for the weak at heart and investing can be a gamble. Not is the supply of agricultural products affected by climatic changes, but also political and socioeconomic factors. A coup d'etat can break out in Brazil and cause sugar cane production to halt. Prices will increase because of an inability to safely harvest and export sugar, which decreases domestic supplies and cause prices at the supermarket to double. Political unrest in South America could affect the production of rubber harvested from trees located in unstable regions. American consumers could see increases in the price of automobile tires until the region becomes more stable. Commodities futures trading will reflect fluctuations caused by changing supplies and demands for goods and livestock affected by climatic, socioeconomic and political factors.
In the final analysis, we live in a global society with a global economy; and events which impact one area of the world can have a far reaching economic impact on continents and people residing millions of miles away. Because of technological and agricultural advances, human beings have not only become citizens of the world, but also their brothers' keepers; producing and supplying food and durable goods from coast to coast and continent to continent. By observing consumer buying trends and global economic indicators, today's investors can realize fewer risks and greater returns from commodities futures trading.
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