The forex market is primarily made up of commodities and currency trading. Often people new to trading ask, what are commodities in forex trading?
Commodities are items that can be bought and sold on the open market. Some popular examples of these would be:
– Wheat
– Coffee beans
– Sugar
– Cotton (textiles)
– Orange juice (agriculture)
– Gold (precious metals)
The impact of international economic relationships
Commodities, like currencies, tend to follow trends over time. They trade as a unit; an increase or decrease in price results from fluctuation in supply and demand. Just as a country’s economy impacts its currency’s value, the global markets also affect commodity prices. The international economic relationships impact the price of a commodity.
For example, suppose a country reliant on exporting oil to the US suffers an economic downturn and begins making less money from their exports. In that case, it stands to reason that the value of their currency will also decrease as demand for their exports drops with falling income. The falling currency means they have less purchasing power per barrel of oil, so prices go up, reflecting supply and demand.
Investors use commodities to hedge risk in their portfolios. Companies that produce commodities tend to do well during periods of inflation because they can pass along rising input costs to consumers. It is essential for investors who trade commodities using currencies not to overextend themselves since there is no realistic way of controlling price movements once all factors are factored in. It is easier to lose money than when trading currency pairs when trading commodities because movements are so drastic and unpredictable at times.
What are commodities used for?
Financial markets have many terms that people new to the financial world do not understand and often get thrown around. One of these terms is ‘commodities’. Commodities are items produced for exchange on a secondary market; they can be raw materials or products. Examples of raw materials would be gold, oil, silver, cotton or even iron ore. You will then find specific products harvested or mined from the earth – some examples would include coffee beans, oranges, rice and cocoa beans.
Other commodities can be stocks of companies involved in commodity production such as De Beers diamonds or mining companies like Rio Tinto, BHP Billiton or Glencore.
Commodities prices
Commodities prices follow some very distinct trends as cycles such as the so-called ‘super cycle’. This is around 20 years where commodities prices generally rise and then decline for a set amount of time before rising again. Commodities traders will be aware of this and generally trade on super cycle lows or highs to maximize returns accordingly. New commodity traders must understand that these price movements can be erratic and start low and go up, come down considerably before going back up again – they do not tend to move in vertical lines!
This makes it difficult to predict future price movements but also means that if you get it wrong, it could spell significant losses! However, it is possible to trade commodities, and you can even do so on just the forex charts with some expert advisors if that is what you want to do.
In conclusion
Commodities trading does not have the same tax implications as just trading regular foreign exchange. There are ways to avoid capital gains tax by holding certain items for a minimum period: easier than worrying about this when trading currencies.
However, it applies equally if you buy and sell within 30 days, so be careful! If you plan to be in a trade for over a year, this becomes less of an issue as long as you use an accountant who understands how an investment works! You can also make use of the educational materials available from Saxo Australia to help you along.
