Essential Guide to Commodity Investment: How to Select the Most Promising Trading Assets

Commodities are listed alongside stocks and bonds as the three core asset classes in the global investment market. Due to their high liquidity and close correlation with macroeconomic trends, their price fluctuations often accurately reflect changes in the global economic cycle. For traders seeking to optimize their portfolios, understanding the characteristics and investment methods of commodities is crucial.

What Are Commodities?

Commodities refer to goods that enter circulation but are not in the retail stage, possessing commodity attributes and widely used in industrial production and consumption in large quantities. The biggest difference from daily consumer goods is their “large” nature: large supply, large demand, large circulation, and large storage capacity. Therefore, they are usually positioned at the upstream of the entire industry chain.

Based on their attributes, commodities can be divided into six major categories: Energy, Industrial Metals, Precious Metals, Agricultural Products, Soft Commodities, and Livestock Products. Since global commodities are mainly transported via shipping, shipping indices are also often regarded as a special trading category.

Detailed Explanation of Major Commodity Classifications

Energy products include crude oil, gasoline, fuel oil, natural gas, and electricity. Among these, crude oil is known as the “King of Commodities” due to its largest supply and highest liquidity. Downstream applications of crude oil cover all aspects of daily life: plastics for food packaging, PTA for textiles, PVC for building materials, gasoline for transportation, highlighting its importance.

Industrial Metals include copper, aluminum, lead, zinc, and iron ore, serving as fundamental raw materials for industrial production.

Precious Metals encompass gold, silver, palladium, and platinum. Compared to industrial metals, precious metals have higher unit value, are almost non-corrosive, and thus serve functions of store of value, preservation, and hedging, playing a long-term role as currency throughout history.

Agricultural Products mainly include widely cultivated grains such as soybeans, corn, and wheat.

Soft Commodities include sugar, cotton, coffee, and other varieties.

Livestock Products mainly refer to meat commodities like pork and beef.

How Should Investors Choose Suitable Commodities?

Although the trading volume of commodities is enormous, not all varieties are suitable for retail investors. Some commodities, due to their special nature or trading restrictions, have limited investment value. For example, electricity futures, despite strong supply and demand, are not ideal for most investors because of transportation limitations and regional price influences.

So, what kinds of commodities are worth paying attention to? The following six criteria can serve as evaluation standards:

High Liquidity Market: The commodity must have sufficient liquidity, meaning substantial ongoing participation by capital. Adequate capital involvement indicates a well-functioning price discovery mechanism with little room for manipulation. Most mainstream varieties like crude oil, copper, gold, and soybeans meet this standard.

Global Uniform Pricing: The commodity is listed and traded on multiple exchanges worldwide, forming a unified global price reference point. Crude oil and gold are typical examples, with traders around the world following international market prices.

Ease of Storage and Transportation: The commodity is easy to store and less affected by regional or seasonal factors. Metals and grains generally meet this criterion.

Standardized Quality: Regardless of production location, the quality specifications remain consistent and are strictly recognized. Crude oil and gold are representatives of standardized quality.

Persistent and Stable Demand: There is long-term, widespread, and stable demand for the commodity worldwide. Oil, natural gas, wheat, and soybeans all exhibit this characteristic.

Ease of Fundamental Analysis: Economic data and industry information related to the commodity are readily accessible, allowing investors to infer price trends based on economic logic rather than relying solely on technical analysis.

Based on these standards, commodities such as crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton are most worthy of investor attention.

Seizing Opportunities in Global Economic Resonance

Since commodities are priced globally, when major economies worldwide experience synchronized economic cycles, the driving force for commodities is strongest. After the outbreak of the COVID-19 pandemic in 2020, global central banks implemented quantitative easing policies, leading to a “money surplus” phenomenon, which triggered inflation expectations and subsequently caused widespread increases in commodity prices. This is a typical case of global economic resonance driving a commodity bull market.

What Are the Investment Methods for Commodities?

Commodity investments mainly fall into two categories: physical investment and derivative investment. Physical investment includes spot trading, mining investments, logistics, etc., but this article focuses on derivative investment methods, primarily futures and options.

For newcomers to the commodity market, it is essential to understand how futures work. Each futures contract corresponds to a specific underlying asset, for example, crude oil futures are based on crude oil spot prices.

After determining the investment target, investors also need to understand the concept of contract expiration. Futures prices are essentially market expectations of the spot price at a future date, so investors need to predict the spot price at expiration and make trading decisions accordingly.

Basic Knowledge of Futures Trading

The final price of commodity futures depends on the spot price of that commodity in a specific month in the future, influenced mainly by macroeconomic conditions, supply, and demand. Deep research into these factors is called fundamental analysis, which determines the direction and magnitude of price movements.

In addition to fundamental analysis, investors can also use technical analysis tools for judgment. However, both are indispensable: fundamental analysis should be confirmed by technical signals to more accurately time entries and exits and control risks; likewise, technical analysis needs fundamental guidance because pure technical signals cannot accurately determine the duration of trends and the extent of price swings. The organic combination of fundamental and technical analysis is the key to successful trading.

Summary

Commodities, alongside stocks and bonds, have become an essential part of global investment portfolios. Participating in commodity investment essentially involves re-pricing the entire global industrial chain.

From an investment practice perspective, investors should combine fundamental and technical analysis, focusing on mainstream futures varieties. Recommended trading targets include crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton. These commodities feature sufficient liquidity, global pricing, and fundamental-driven prices, making them most suitable for medium- to long-term investors.