Mastering the correct approach to commodity investment: from selecting the varieties to operational strategies

In global asset allocation, commodities are listed alongside stocks, bonds, and foreign exchange as core investment targets. Their importance stems from their strong liquidity and close correlation with economic cycles—price fluctuations often accurately reflect the true state of the global economy. To profit from the commodity markets, one must first understand their nature and investment logic.

Core Characteristics of Commodity Investment

Commodities refer to large quantities of physical goods that enter circulation but are not retail products, possessing commodity attributes and widely used in industrial production and consumption. Compared to ordinary goods, their key feature is “large volume”: massive supply, demand, circulation, and inventory, often positioning them at the upstream of the industry chain.

Based on their nature, commodities are mainly divided into six categories. Energy (crude oil, gasoline, fuel oil, natural gas, electricity, etc.) is the most active, with crude oil being dubbed the “King of Commodities” due to its high liquidity and extensive downstream applications. Industrial metals (copper, aluminum, lead, zinc, iron ore) directly reflect industrial prosperity, while precious metals (gold, silver, palladium, platinum) are characterized by scarcity and value preservation, serving both monetary and hedging functions. Agricultural products (soybeans, corn, wheat), soft commodities (sugar, cotton, coffee), and livestock (pork, beef) are directly related to people’s livelihoods. Additionally, since transportation mainly relies on maritime shipping, shipping indices have become a special reference category.

How to Select Worthwhile Commodities for Investment?

Not all commodities are suitable for investment. Some varieties are less ideal due to regional restrictions, trading design, and other factors. For example, although electricity has huge supply and demand, its transportation limitations and regional price differences make it less attractive to most investors.

So, what kind of commodities are worth paying attention to? They need to meet the following key conditions:

Sufficient liquidity and unified global pricing. High-quality commodities must attract a large variety of capital participation, forming adequate pricing, which helps prevent price manipulation. Additionally, these commodities should be listed on multiple exchanges worldwide, facilitating global traders to trade at a unified market price. Crude oil, copper, gold, and others meet these criteria.

Ease of storage, transportation, and standardization. The commodities should have good preservation conditions, be less affected by regional or climatic factors, and have standardized quality that is strictly recognized regardless of origin. Metals and grains perform well in this regard.

Stable demand and easily analyzable fundamentals. These commodities have long-term, stable demand worldwide, and relevant information is readily accessible. Investors can judge price trends based on economic logic rather than relying excessively on technical analysis.

In summary, crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, cotton are the varieties most worth focusing on.

Timing of Commodity Investment

As globally priced assets, the best investment opportunities in commodities often occur during periods of resonance among major global economies. For example, in 2020, after the outbreak of the pandemic, global central banks implemented quantitative easing policies, creating an inflation environment of “more money than goods,” which led to a significant upward trend in commodities. Understanding macroeconomic drivers at this time is crucial.

Methods and Key Points for Commodity Investment

Commodity investment includes physical industry investments (spot trading, mining investments, logistics, etc.) and derivatives trading. For most investors, derivatives trading (mainly futures and options) is more practical.

The first step in participating in commodity futures is to clarify the investment target. Each futures contract corresponds to a specific commodity, such as crude oil futures representing crude oil spot. The second step is to confirm the contract’s expiration month, as futures prices are based on expectations of the spot price in that month. Investors must predict and formulate investment decisions accordingly.

Fundamental analysis is central to price prediction. Futures contracts ultimately benchmark the future spot price of the commodity, influenced mainly by macroeconomic conditions, supply, and demand. Studying these factors is called fundamental research, which determines the direction and magnitude of price movements.

Technical analysis should serve as a confirmation tool for fundamentals. Relying solely on technical analysis cannot accurately determine the duration of trends and volatility, and fundamentals also need technical confirmation to precisely time entry and exit points. Combining both approaches allows for risk control and higher success rates.

Summary

Commodity investment essentially involves re-pricing the global industrial chain. This asset class is as important as stocks and bonds and is a vital option for diversification. Successful commodity investors need to master proper screening criteria, focus on high-liquidity, globally priced, and fundamentally driven quality varieties such as crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton. Under the guidance of macroeconomic cycles, fundamentals, and technical analysis, they can accurately seize investment opportunities.