Trading Commodities


Following on Piggy’s discussion on Trading Gold, it should be highlighted that IronFX also provides an opportunity for retail investors to trade commodities such as Oil, Silver, Platinum and Palladium.

OIL

Oil is an interesting commodity. IronFX enables individuals to trade Brent and West Texas Intermediate (WTI) Oil.  Crude oil is a naturally occurring petroleum product commonly used in energy production and manufacturing. It is typically purchased with the intent to be refined into everyday uses such as diesel, gasoline, heating oil, jet fuel, plastics, cosmetics, medicines and fertilisers. As such its price has a dramatic impact on the global economy.

Oil is traded in high volumes all around the world. The price of oil is a critical global economic factor, which means that trading is influenced by political and commercial concerns. In general, higher oil prices tend to undermine economic growth as this increases travel and shipping expenses, which increase inflationary pressures. If the price of oil remains high over a long period, the cost of downstream products like plastics and fertilisers are affected as well. However, having a low oil price for an extended period is also not an unequivocally positive factor for the global economy. When the price of oil remains low for too long, the companies that explore and drill for oil cannot raise the capital they need to find and produce enough of it.

There are a number of events that have to be observed when trading oil. For example, Geopolitical insecurity almost always has a direct effect on the price of the commodity. War, or the threat of conflict, will push the price of oil up. Similarly, if there is political instability affecting an important oil producer– elections or other political changes in these countries can push up the price as well. Traders should always be aware of the destabilising effect that shale oil production in the US has had on the global oil price. The industry is still trying to adjust to the vast changes that this trend is imposing on price dynamics.

SILVER

Spot silver is a precious metal available on on-line trading platforms.  The trading of CFDs on spot silver (USD/EUR) is executed in a similar way as currency trading; there is no centralised marketplace and trading is accessible 24 hours a day, 5 days a week. Silver is a soft, white, lustrous transition metal that has been mined since at least the fourth millennium BC. Most of the silver that is produced is a by-product of mining for gold, copper, lead and zinc. The major producers are Peru, Mexico and Australia. Silver metal is used in many pre-modern monetary systems in bullion coins, sometimes alongside gold. It is also used as a currency by many individuals and is legal tender in the US state of Utah

The main uses of silver are largely industrial and business-related, constituting approximately 63% of global consumption whilst jewellery constitutes 27%. A significant amount is consumed in the photography industry.  However, the amount of silver used by that industry is declining because of the use of digital cameras. Nonetheless, the leading use of silver remains in electronics since silver is considered a better electrical conductor than copper. In fact, silver is considered “one of the best technology stocks” that one can buy given that there are patents being filed with the US Patent offices on a weekly basis for new uses of silver. Pure-silver has the highest thermal conductivity of any metal.  As a result, it is applied in high-technologies in which reliability, precision and safety are critical. This includes in cell phones, personal computers, automotive batteries, satellites, high tech weaponry and digital technology. Other applications are in the solar industry and biotechnology. Silver is used in solar panels employed for photovoltaic power generation and has significant applications in biotechnology. Overall, the uses of silver are vast and an upsurge in demand is expected  from emerging industries such as renewable energy (solar) and biotechnology.  Interestingly, the demand for silver has exceeded mine supply for over a decade and the short fall has amounted to about 150 million oz of silver per year.  There is also strong evidence that in earlier times, silver commanded much higher prices. In the early 15th century, the price of silver is estimated to have surpassed cUSD 1,200/oz in today’s terms.

PLATINUM

Platinum, a grey-white transition metal mostly referred to as “white gold” or “the rich person’s gold” is a precious metal that is also available to trade through CFDs.  The metal is extremely rare; with South Africa accounting for almost 80% of the world production (other large deposits are in Russia and Canada). As a result, it is mostly used as a symbol of prestige and many advertisers associate it with exclusivity and wealth. For example, platinum debit and credit cards have greater privileges than gold cards.  In watchmaking, Vacheron Constantin, Rolex and Breitling use platinum for producing their limited-edition watch series. In the 18th century, platinum’s rarity made King Louis XV of France declare it the only metal fit for a king. As with other instruments, having a solid knowledge on the underlying fundamentals influencing pricing is critical.  An understanding of the uses of platinum as a metal provides a good foundation for further analysis. Platinum is mostly used in the automobile industry as a catalytic converter and for vehicle emissions control devices. Further, it is used in the petroleum industry as a catalyst in a number of different processes. Other uses include laboratory equipment, electrical contacts, electrodes, thermometers and jewellery. Some minor applications include medicine and biomedicine, glassmaking equipment, anticancer drugs, oxygen sensors, spark plugs and turbine engines.  Therefore, fundamentals that affect pricing could be factors such as global economic growth and the general level of living standards. For example, when economies such as China are expanding, the demand for automobiles increases. In the same vein, a higher standard of living means more money available for discretionary spending. Another characteristic is that while platinum has a much shorter history in the financial sector than gold or silver, its prices are relatively volatile due to limited production and its importance as an industrial material. This volatility creates opportunity for CFD traders, who are particularly looking to profit on price movements. During periods of sustained economic stability and growth, the price of platinum tends to be as much as twice the price of gold, whereas during periods of economic uncertainty, the price of platinum tends to decrease due to reduced industrial demand, falling below the price of gold. Overall, platinum spot trading is executed in much the same way as any other spot commodity or foreign currency pair, with transactions being made against the USD according to the spot rate. The advantage is that traders can make use of leverage to invest in platinum contracts with just a fraction of the purchase price.  Besides, the frame of the Crown of Queen Elizabeth, The Queen Mother, manufactured for her coronation as Consort of King George VI, is made of platinum!

PALLADIUM

Palladium is a silver-white metal that is part of platinum group metals (platinum, palladium, ruthenium, rhodium, iridium and osmium). Much like platinum, nearly 86% of all palladium production is from Russia and South Africa (Russia 55% and South Africa 31%). USA and Canada account for 11%, while the remaining 3% is produced by the rest of the world. The single largest mine for the production of palladium is the Norilsk-Talnakh in Russia. In fact, palladium is one of the rarest metals on earth, about 15 times rarer than platinum and 30 times rarer than gold. This creates cause for concern as any decrease in production can contribute to volatility in palladium prices.  Similar to platinum, the automotive industry accounts for the majority of palladium consumption at approximately 48% of total demand. Jewellery-related consumption constitutes 21%, electronics 14% and dentistry 13%. In the automotive industry, palladium is used in catalytic converters. While it is very flexible and less costly to trade precious metals through CFDs, traders should understand some of the fundamentals affecting pricing such as;

  • Economic growth and demand factors. The manufacture of auto catalysts contributes approximately 50% of palladium’s global demand. Increasing automotive production in economies such as China can lead to supply shortfalls;
  • Jewellery demand. Palladium is most often used for setting diamonds. Any resurgence in the jewellery market will likely see palladium rise in price;
  • Global production. Unlike gold and silver, palladium is only mined in a few countries. Declining mine production in South Africa and Russia, coupled with increasing demand may lead to deficits, which may in turn boost pricing; and
  • Economic and political developments in Russia. Most of the global palladium output is produced by Norilsk Mine in Russia. Actual output levels of palladium have largely been a “state secret”. However, Norilsk and other Russian palladium producers now release information on production, reserves, inventories and other data. This has allowed for greater transparency and reliability of Russian palladium supply estimates.

Overall, palladium trading is a potentially lucrative source of income for the attentive speculators, who understand global dynamics. We recall that around the year 2000, the Russian supply of palladium to the global market was disrupted due to political reasons. The ensuing market panic drove the price to an all-time high of USD 1,100 per ounce. Around that time, the Ford Motor Company, fearing that automobile production would be disrupted by a palladium shortage, stockpiled the metal. When prices fell in early 2001, Ford lost nearly USD1 billion.

Piggy has recommended beginners who would like to venture into the world of Global Market Online Trading to complete the babypips course. The instructions are outlined here; https://piggybankadvisor.com/2019/05/30/an-fx-trading-course-for-beginners/

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