The Trend

Three Ways to Trade Commodities

So, you want to invest in commodities?

Maybe you watched the price of natural gas skyrocket in February or watched the price of gold plunge and wondered why you weren’t trading the volatility in the space.

Maybe you didn’t know how.

Aside from futures trading, something many of our customers engage in, there are three popular ways to trade commodities.

The first method is through stocks. If you’re looking to trade gold, you could purchase gold stocks like AngloGold. If you want to trade oil, Exxon, Marathon or any of the others fuel companies are options. However, there are problems with that strategy. Trading a company comes with a lot more variables. Is it well managed and are its mines producing as well as others? How about regulatory or legal matters? The price of the commodity could go higher while the price of the company moves lower for no other reason than a weak overall market.

Second method is trading commodity stock ETFs. If you want a piece of the agriculture market which, in general, reacts to the price of corn and other agricultural commodities, there are agriculture company ETFs. The Market Vectors Agribusiness ETF holds stocks like Monsanto, ADM and Deere to name a few. The advantage is that you’re not placing a bet on one stock, but a whole basket.

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The problem is that you’re even more removed from the actual commodity. If corn moves lower, it may affect Deere, but Deere is only one of many stocks in the ETF. It’s a safer way to play the commodity market but the correlation isn’t high.

Finally, there’s commodity ETFs. For traders not wanting to trade futures, this is the most correlated way to trade commodities. These ETFs track the price of the actual commodity. (Each will track the price differently.) The SPDR Gold Trust tracks the actual price of gold while the United States Natural Gas Fund tracks the price of natural gas. Commodity ETFs are great for short term trades, but don’t necessarily make great long-term holds. Many are based on futures contracts. As those contracts are rolled over, the long-term correlation between the ETF and the commodity breaks down.

Be warned that commodities are a hard trade due to volatility caused by world-wide factors that are hard to track. Thoroughly understand the ETFs and the baskets or markets they track before you trade with real money.

This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy. The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author.

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