Commodities We Consume in Everyday Life
We often hear that investments or trading activity in commodity markets are laden with risk. It is true that commodities tend to be more volatile market assets than equities, debt, and currencies. The historical volatilities of many commodities are far higher than other assets.
However, the fact is that the traditional vehicles that allow market participants to access the commodity markets, futures and futures options, are highly leveraged instruments that add another level to the risky nature of the business. When it comes to futures and options on futures contracts, only a small amount of capital is necessary to control a much larger amount of the commodity creating a higher degree of risk. Greater potential for reward offsets higher risk in markets, but traditional commodity investment vehicles are not right for all market participants.
The leverage in the futures and options markets is the reason for the risky reputation of commodities trading and investing.
Over recent years, new instruments have diminished some of the risks of trading and investing in commodity markets. ETF and ETN products have brought commodities directly to the regular equity trading and investment accounts of a much larger and more diverse addressable market.
The fact is that all investors have knowledge about commodity assets and using this know-how and experience can only enhance investment results when correctly applied to the quest to save and invest for the future. Greater price volatility often yields more opportunities to profit and grow savings when managing our capital. When considering allocating a portion of your money to the world of raw material markets, one should start by watching those commodities we interact with every day.
Commodity Sectors We Consume Every Day
Six main segments in the commodity markets trade on U.S. futures exchanges. These commodities offer a high degree of liquidity and most have ETF and ETN products that attempt to replicate price action in the futures contracts. The human brain is an amazing file cabinet of information. The vast majority of us are consistent consumers of commodities and that means we have an incredible store of knowledge that can help us grow our capital. Consider using your everyday knowledge gained as a user to hone your investment acumen and enhance the growth of your nest egg.
We put gasoline in our cars, heat and cool our homes, and use electricity to power our lives on a daily basis. Crude oil, petroleum products like gasoline and heating oil, and natural gas are some of the main ingredients in fueling out lives. These energy commodities trade on a highly liquid basis on futures exchanges and all have ETF and ETN products that replicate price movements in the futures and physical markets.
Gold, silver, platinum and palladium all play a part in our daily lives. If we wear or buy jewelry, we are consumers of precious metals. When we drive a car, it is likely that our automobile has a catalytic converter that contains precious metals that have a high melting point. The precious metal catalysts clean poison from the air as they filter or diminish emissions.
When we turn on the water faucet, the water flows through pipes that likely contain copper. The homes we live in and the cars we drive contain steel, which often includes alloys such as zinc, nickel, and tin. We wrap our leftovers in aluminum foil or have aluminum siding in our homes to protect against Mother Nature and make them energy efficient. We use batteries that contain lead or other metals that create power.
We all require nutrition. The main ingredient in bread is wheat. Corn not only is an important food source for us and the animal proteins we eat but it is also a critical biofuel in the U.S. Each time we fill our car with gas, a percentage of the fuel is corn-based ethanol. We consume mayonnaises, salad dressings and use cooking oils that are products of soybeans.
Many of us start the day with a cup of coffee and some stir in some sugar, both of which are soft or tropical products. We drink orange juice, eat chocolate and wear clothes made of cotton. These three commodities trade on futures exchanges in the United States.
There are many other examples of commodities we use in our day to day lives. We may use fertilizers to help our gardens grow, or consume lumber when we purchase a new house. We pay for all of these commodities during our daily lives, sometimes directly, sometimes indirectly but their prices affect our daily lives and pocketbooks. When the prices move dramatically, as they often do, we see an immediate change in our living expenses. Our electric bills go up and down, the cost of filling our cars with fuel changes on a weekly basis.
We are all sensitive to these price changes, and this is information that we could and should use to enhance our investment returns.
The most direct route to the commodities market for investors is through the futures markets, but ETF and ETN markets have brought them to our stock accounts. Additionally, many companies that trade on stock exchanges are directly involved in specific commodities as producers, and almost all are consumers of the raw materials necessary to manufacture products that arrive at stores for sale. Even our cell phones require commodities; there are rare earth metals that make all of the high-tech applications work these days.
Commodities in the future
The population of planet earth continues to grow. Commodities are finite goods, there is only so much of a commodity available at a price. As global demand for raw materials increases, it will likely lead to more demand and higher production costs thus increasing commodity prices. Therefore, the commodities we use each day are likely to go up in price in the future as demand increases because more people compete for those staple goods. However, be careful as commodities are volatile assets and other factors will impact price along with steadily increasing demand.
We consume commodities every day as members of modern society. Harness your experience as a consumer to enhance your investment returns by watching prices, questioning changing expenses and researching the reasons for those changes; the chances are that changes in raw material prices are the reason. Commodities are some of the most responsive assets when it comes to shifts in both micro and macroeconomic cycles. Incorporate your knowledge into your investing and trading activities and it is likely that you will see results improve, and your assets grow.