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Things to Consider When Trading Commodities

There is a fierce competition among Forex brokers. Because of that, today’s Forex brokers do not offer only currency pairs to trade, but also other products that are not necessarily related to currency trading. Commodity products like gold, oil, and silver are on the offering list of all Forex brokers.

When someone decides to trade commodities, multiple things must be considered. The type of the commodity traded, the conditions offered, and so on. Here are some things to consider when trading the two most important commodities (gold and oil):

-        Trading gold. Gold plays an important role in the financial system. While the U.S. dollar is the backbone of the current financial system, gold has always been looked as the other option to save. Gold is viewed as a safe-haven in the sense that when things go wrong in an economy (even in the global economy), gold is the safest investment. Throughout history, gold coins circulated in the form of money. Now, gold is not even backing the currencies anymore. Before the Bretton Woods system, gold used to back the currency in circulation in a country. It means that for every money that was created, physical money, a specific quantity of gold must be held in the central bank’s vaults. Not anymore. These days gold trades based on imbalances between supply and demand around the world, and it is affected by these levels. For example, gold may rise because gold producers are on strike in a specific country or because India, one of the biggest gold buyers, is having a slowdown in demand. Gold is used to buy influence too. Central banks around the world have a bigger influence if they stock more gold. China is known recently to have bought vast amounts of gold and it is no wonder that it is part of the IMF (International Monetary Fund)’s SDR (Special Drawing Rights) basket now. In forex trading, gold is represented as XAUUSD, when it is paired with the dollar. But gold can be expressed in other currencies too. The XAUUSD pair can be traded on any Forex broker but traders should know that the margin needed is bigger than in the case of a regular currency pair and that gold, in general, is more volatile than a currency pair.

 

-        Trading oil. Oil is another commodity traded by Forex traders. Even the ones that do not physically trade oil, they look at it or at least trade a related currency. The Canadian dollar is strongly dependent on the oil market. This is because the Canadian GDP (Gross Domestic Product) is strongly dependent on the oil prices as Canada is an energy driven economy. Therefore, when one is buying or selling the USDCAD pair, in fact, is trading oil too, because the two financial products enjoy an inverse relationship: when the USDCAD rises, oil falls, and when oil falls, the USDCAD rises. This makes the news to watch for the oil market, like oil inventories are important for the USDCAD pair as well. When inventories rise, the oil price falls and the USDCAD rises. When inventories fall, the opposite happens. Oil is an inflationary element too. The higher it goes, the higher the inflation will be. The lower it goes, the less inflation will be. Because inflation is part of central banks’ mandate, what happens with the oil price matters for everyone. The recent drop in the last year from the $100 level to below $40 caused financial markets a lot of pain. Inflation dropped all over the world, with some parts of the world seeing deflationary levels. As a separate note, deflation is more difficult to fight than inflation, as central bankers need to adopt unconventional measures to fight it.

All in all, gold and oil are the most popular commodities and the currency market and other financial products are heavily influenced by the imbalances in the oil and gold supply and demand levels.

 

 

 

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