What are commodities?
Commodities are tangible goods, or so-called hard assets, that are interchangeable with products of the same type and similar value.
They are basic goods that are standardised, implying that no matter who produces a commodity, or where it originates from, two equivalent units of the commodity will, approximately, have the same quality and price. For instance, one ounce of gold will have the same value whether it is mined in South Africa, Australia, or Russia.
To be categorised as a commodity, an item must satisfy three criteria:
- It must be standardised, and moreover, for agricultural commodities, it must be in a ‘raw’ condition.
- It must be usable upon delivery.
- Its price must fluctuate enough to substantiate the creation of a market for the item.
Types of commodities
There are four main types of commodities:
- Energy commodities: Such as crude oil, coal, and natural gas. (Also referred to as hard commodities.)
- Metal commodities: Include precious metals such as gold, platinum, and silver, as well as base metals like copper, aluminium, and zinc. (Also called hard commodities.)
- Agricultural commodities: Comprise, among others, wheat, cotton, corn, sugar, rice, and coffee beans. (Known as soft commodities.)
- Livestock commodities: For example, livestock such as cattle, sheep, and pigs, as well as meat commodities like pork bellies. (Also referred to as soft commodities.)
Factors that can affect commodity prices
Various factors can determine the prices of commodities and contribute to the volatility in prices from time to time. Each individual commodity has unique factors that can influence its price.
Mainly, the law of supply and demand is the most influential factor that can affect the price of a commodity.
Commodity supply and demand
Normally, if supply and demand even out, prices should remain constant. However, anytime there is any indication that the supply of a commodity will dwindle, the market will respond with higher prices, and vice versa, higher supplies could generate lower prices.
There are various factors that can change the price of a commodity, such as:
- Weather: Abnormal and unexpected weather changes, such as extreme rainfall or persisting drought can impact the production of agricultural commodities Commodities such as corn, wheat, and coffee need consistent weather cycles.
Furthermore, the weather can also affect energy commodity prices. Harsh winters increase the demand for heating, thus increasing the demand for natural gas and heating oil, as well as for coal in rural areas and informal settlements in developing countries.
Likewise, extremely warm summer weather and heatwaves elevate the demand for air conditioning. Therefore, raising the demand for commodities such as natural gas and coal that are needed for electricity generation.
- Consumer habits: Lately, many people are actively trying to consume less sugar due to health considerations. If this habit gains more momentum, the demand for sugar could decrease, causing a fall in sugar prices.
- Production issues: Political instability, labour strikes, regulations, taxes, trade laws, and terrorism, are all factors that can have an influence on the production of energy commodities, such as oil and coal, and metal commodities, like gold and platinum. A decline in production can eventually lead to shortages and rising prices.
- Worldwide pandemics: The effect of the Covid-19 pandemic on commodities is enormous. The demand for a variety of commodities dropped drastically. To mention just a few examples:
- Most metal prices declined in the first quarter of 2025, indicating a collapse in global industrial demand.
- Brent crude oil fell to its lowest level in 18 years at the end of March 2025. This was a clear sign of a decreased demand for oil as the majority of global transport and transport in countries were stopped.
- However, due to economic uncertainty and the unpredictability of when the Coronavirus will flatten, investors have fled to gold as a ‘safe haven’. The increase in the demand for gold, resulted in a new record gold price of over 2 050 US dollars per ounce on August 5, 2025.
- Inflation: When inflation occurs, prices of commodities typically change accordingly. This happens because commodities offer protection against the effects of inflation. As the demand for services and goods rises, their prices surge, as well as the prices of the commodities utilized to produce those goods and services. Thus, an increase in the inflation rate, stimulates the demand for particular commodities.
Commodities markets
Commodities markets or exchanges are markets where various commodities are traded. In the past, commodities were mostly traded physically, whereas today, trading in commodities mainly takes place via electronic networks.
Commodities can be bought and sold directly in the cash (spot) market or via derivative financial instruments, such as options and futures.
Dealers trade commodities daily on an exchange. That means commodity prices are not set and change every day. The consequence is that the prices can be volatile, depending on demand and supply.
When traded on a commodity exchange, a commodity must meet specific minimum standards and grades.
Globally, there are numerous commodities exchanges, such as:
- The New York Mercantile Exchange in the USA: For energy commodities, precious metals, and base metals.
- The Minneapolis Grain Exchange in the USA: For agricultural commodities.
- The London Metal Exchange in England: For industrial (base) metals.
- The Nairobi Coffee Exchange in Kenya: For coffee beans.
- The South African Futures Exchange (SAFEX), a subsidiary of the Johannesburg Stock Exchange (JSE) in South Africa: It comprises two divisions of which one is an agricultural market division (AMD) for the trading of agricultural derivatives.
Additional to the so-called traditional commodities, foreign currencies, bandwidth, and certain financial instruments, such as indices, are also traded on commodity markets these days.
Trading commodities
There are various methods to trade with commodities, such as, investing directly in the commodity, utilizing commodity futures, trading commodity options, using commodity ETFs, trading CFDs on commodities, and buying shares in companies that produce commodities.
The following descriptions of what the different ways entail, are only short summaries and do not intend to elaborate on the detail of the different trading methods.
Investing directly in the commodity
This means you have to purchase the goods themselves. With the exception of precious metals, such as gold and silver, which are available in small quantities, this is not a feasible method.
Trade commodity futures
Commodity futures contracts offer direct exposure to changes in commodity prices. Futures are derivative financial instruments, with a commodity as an underlying asset.
They are obligations to buy or sell a certain quantity of a particular commodity at a predefined price on a specific day in the future.
Futures have the benefit, but also the risk, of leverage.
Commodity options
Like futures, options are another type of derivative that enables a trader to trade on the price of a commodity without having to buy the commodity totally.
The holder of a call option has the right, but not the obligation, to purchase a commodity futures contract at a specific price (strike price) on or before the expiration date. Contrarily, the owner of a put option has the right, but not the obligation, to sell a futures contract at the strike price on or before the date of expiry.
Like futures, options have the benefit, but also the risk, of leverage.
Commodity ETFs
An exchange-traded fund (ETF) is a fund that invests in a group of financial assets. With regard to commodities, some ETF’s invest in physical commodities, such as gold, while others invest in commodity options or futures.
Investing in commodity ETFs has the advantage of the diversity of a range of assets via a fund. However, ETFs that invest in physical commodities or futures, mirror the risks of the assets they contain.
Commodity CFDs
As with options and futures, CFDs (contracts for difference) are another derivative that can be utilized to trade in commodities.
Buying shares of companies that produce commodities
The assumption is that the revenues of these companies, such as gold mining and oil companies, are based on the price of the commodity they are producing.
What are the best commodities to invest in?
Put simply, there is no clear answer. There is no one method to invest in commodities that suits every investor or a particular commodity that is best for everyone.
All the commodities, and methods to trade, have their advantages and disadvantages. Eventually, you need to consider your own level of risk aversion, trading strategy, and the pros and cons of the commodity you are interested in.
Frequently Asked Questions
Can you trade commodities on forex?
Yes you can.
Which is better to trade – forex or commodities?
When it comes down to a choice, remember that commodities are heavily regulated as opposed to forex that is more loosely regulated.
Is Forex a commodity?
No, the forex market trades in currencies, etc. dollars, yen, euro…
How do you trade commodities with little money?
Take a look at Mutual Funds & ETFs
What are the most commonly traded commodites?
WTI & Brent crude oil / Natural Gas / Soybeans / Corn / Gold / Copper / Silver
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