Commodities
WHAT ARE COMMODITIES?
Do you ever think about what goes into that cup of coffee you reach for every morning? What about the gas that you use to fill up your tank every week? Most of us never realize it, but virtually all of the goods begin with commodities.
Commodities are an extremely important part of the financial market. That's because they are essential for producers and manufacturers. A commodity is essentially a basic product or raw material used to make all the goods and services that we need in our everyday lives.
There are a wide array of commodities, including oil, gas, coffee, soybeans, and rice. These commodities are traded on commodity exchanges around the world such as the Chicago Mercantile Exchange (CME), the London Metals Exchange, and the Intercontinental Exchange (ICE). Investing in commodities provides investors with a way to diversify their portfolios, especially during times of market volatility.
Want to learn more about this unique part of the market? Keep reading to find out more about the different types of commodities, their price structures, and who sets them on the market.
KEY TAKEAWAYS
Investors can participate in the base metals market by buying shares of companies like U.S. Steel, futures, options, and various ETFs.
Precious metals offer the widest field of opportunities for investors, with mining companies, ETFs for both stocks and the metals themselves, options, futures, and even direct purchases of physical metals.
As rare earth metals became more important to both technology and the economy, investors became more interested in shares of rare earth producing companies and related ETFs.
Base metals
In chemistry, metals that oxidize or corrode easily are referred to as base metals. These industrial metals include copper (Cu on the periodic table), nickel (Ni), aluminum (Al), zinc (Zn), lead (Pb), tin (Sn), and iron (Fe)/steel (an alloy of iron and carbon).
Base metals are generally plentiful and are used in a variety of commercial and industrial applications. These applications include copper plumbing, aluminum cans, and the steel used in automobile production. Because of their abundance, prices for base metals are far below those of both precious and rare earth metals. Their prices respond to changes in demand for the products for which the metals are used.
Investors and traders can participate in the base metals market in several ways. Investments can be made in individual companies specializing in particular base metals production, including steel company U.S. Steel (X) or aluminum company Alcoa (AA). Futures and options contracts of individual metals can be traded, such as copper futures (HG) and options (HX) on CME Globex.
In addition, a wide variety of base metal exchange traded funds (ETFs) exist. One of them is the Invesco DB Base Metal Fund (DBB), which is composed of futures contracts on aluminum, zinc, and copper. The SPDR S&P Metals & Mining ETF (XME) is another, and it is made up of companies involved in the metals and mining industries. Finally, the iShares U.S. Basic Materials ETF (IYM) consists of companies engaged in producing basic materials.
Precious Metals
Precious metals are naturally occurring metallic chemical elements that have a high luster and melting point. They are softer and more ductile than other metals and are less reactive than most elements. Precious metals include silver (Ag), gold (Au), platinum (Pt), and palladium (Pd). Because of their scarcity, precious metals are valuable—much more so than the base metals. They are used for jewelry, art, coins, dental work, medical devices, electronics, and investment purposes.
Like base metals, a wide range of investment vehicles are available to those interested in the precious metals markets. Gold has long been considered a solid investment and is often physically held in the form of jewelry, coins, or gold bars. Particularly during times of economic uncertainty, gold gains popularity as an asset of last resort. Aside from physical possession of precious metals, investors can trade stocks, futures, options, mutual funds, and ETFs based on precious metal holdings.
Examples of stocks include Eldorado Gold Corporation (EGO) and Agnico-Eagle Mines Limited (AEM), both Canadian-based gold producers. Furthermore, the CME Group offers investors a choice of gold futures and options contracts. The full-sized contract is based on 100 troy ounces (GC), while the e-mini gold contract is 50 troy ounces (QO), and the micro gold contract is 10 troy ounces (MGC). Gold options are also available in a contract size of 100 troy ounces (OG). Futures and options contracts are also available for silver, platinum, and palladium.
Precious metal ETFs include the physically backed and heavily traded SPDR Gold Trust ETF (GLD), the VanEck Vectors Junior Gold Miners ETF (GDXJ), and the iShares Silver Trust ETF (SLV). The Invesco DB Precious Metals Fund (DBP) and the Aberdeen Standard Physical Palladium Shares ETF (PALL) are among the other choices available.