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 Guide To Trading Commodities

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Published Date: 13 Aug 2022Updated Date: 23 Mar 20236 mins readBy MOFSL
Commodities a Good Investment

Investors have gone the whole hog where commodities are concerned, piling on with investments in the commodities markets, sending prices surging. However, after the storm comes the calm, and if you want to indulge in commodities trading currently, you should know about the timing of your actions. In the last leg of the bull run, commodities took centrestage. Commodities soared as they seamlessly rode on the post health crisis demand that came stomping among investors. At this time, the prices of major commodities reached new highs. Now, though, market gurus who know their commodity markets well, are professing that it is not a good idea to buy commodities right now. Why? Markets are crowded, there’s too much flux, and prices are too high. 

Online Commodity Trading - Not a Good Idea Right Now?

In spite of several investors who wish to open a demat account and aggressively trade in stocks and other assets like commodities, experts claim that commodity investment in the current times is a bad idea. Equity investment is advised, rather than investment in any commodity. Investing in companies with the power of pricing on their side would be a better bet to tide over inflation that is at its highest levels now. Analysts and emerging market experts, like Mark Mobius for one, state that, even though the prices of commodities are apt to go up in the near future, it isn’t wise for investors to look at commodities right now. 

The Story of Commodities

If you are flummoxed as to why you shouldn’t go in for commodity trading online and  investment right away, and instead, look at stocks, your picture of things will be clearer if you learn a bit about commodity history. Since 2006, the portfolios of fund managers and investors have been the most weighted by commodities. The latest results of a Bank of America survey (https://www.barrons.com/market-data/stocks/bac) show that 38% of investors have commodities in their portfolios, and quite heavily. This is simply because commodities trading and investment has seen unprecedented highs, but these, one must recall, are followed by huge lows (and blows). 

In the area of commodities trading, external factors, both domestic and international, tend to inadvertently affect commodity prices and bring values down or take them up. This is the case with many asset classes, but is prone to be higher with raw material like commodities as their demand and supply is affected directly by circumstances and events in different parts of the world. 

Immediate Gains, But Future Losses

In the USA, commodity funds were on a high in April 2022, with some funds trading at above their moving averages. That implied that they were much above their long-run trends. This means that prices had to drop after such highs. With a spate of world events, majorly involving Russia and Ukraine, and now, China and its imposition in Taiwanese straits, the markets face volatility frequently. Due to the Russia-Ukraine rift, the supply chain from Russia has been halted. The price of wheat has multiplied as Ukraine, a huge supplier of wheat, is under siege. Right now, the commodity market looks too crowded, and it's not likely that any fervent online commodity trading will be happening soon. In the midst of such an atmosphere, commodity investing should be, perhaps, postponed. 

Overcrowding and High Prices

Around 34% of the fund managers surveyed by the Bank of America stated that overcrowding in the commodity market, particularly in the oil segment, has led to this being the most crowded trading market to date. This is higher than trading in other assets  like tech stocks and Bitcoin. What this means is that commodities could be long overdue for a significant pullback soon. According to Dow Jones data, when commodities are riding at higher than their 200-day averages, they tend to see a sharp drop (by 15%) in the months that follow. In six months time, the decline could be close to about 40%. With prices of commodities so high and the sentiments of investors veering towards lasting inflation, now is not the time for commodities trading

Commodity Investments

There are those investors who would still go ahead and invest in commodities during these uncertain times, believing that prices will continue to rise. However, acknowledging that sharp corrections may take place, some investors think it is wise to wait a while before you invest. The idea is to buy at low value and sell at high prices, not the other way around. 

Nonetheless, with the advent of electric cars and all the hype around them, some investors believe that the demand of some commodities, like lithium, lead and copper, will only rise in the times to come. Hence, online commodity trading may still continue in certain commodity areas. With inflation, gold continues to be a solid hedge, and people continue to invest even during hard times, believing that the metal will save them during a rainy day. 

Predictions and Hopes

Some investors predict, and you could call it “hope”, that commodities will see an uptick once the situation in the world stabilises. When this will happen is anybody’s guess, and until there is some clarity, rushing into investments is a bad idea. The point is, there are two sides to every story, and investors feel that Russia and its oil supply will come back with a bang, once sanctions are lifted after the crisis. Although certain commodities are affected more than others right now, commodities trading in gold may be a good idea, as the commodity is always going to stand you in good stead as an investor at any point in time. 

You can easily invest in stocks and any upcoming IPO in the meantime. These are still considered good investments even during times of inflation, but do your research well and take baby steps. If you wish to invest in stocks, you may open a demat account to do so. You could also consider different avenues of investment like mutual funds, always considered sound and balanced. The general consensus is not to invest in commodities currently, but emerging commodity companies may be a good bet to invest in presently. 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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