This post was originally published by Deriv on 30 June 2022
With a wide variety of assets across different levels of volatility, liquidity, and risk, the history-filled commodities market offers traders plenty of great trading opportunities.
In this blog post, we’ll go through why trading commodities like gold and oil is a good idea.
1. They balance your portfolio
Trading commodities can be a great way to diversify your trading portfolio because they tend to have a low correlation to traditional financial assets like stocks or currencies.
Correlation measures how the values of two assets move in relation to each other. A low correlation means that the values of the assets will move in opposite directions. For example, when the value of stocks drops, the value of commodities may rise. This can help to balance your risk across a variety of markets.
If you’re looking to diversify your trading portfolio, commodities can be a good option. But, it’s important to do your research and understand the risks involved before you start trading.
2. They protect you against inflation
You might have heard the term “hedge against inflation” when referring to commodities. Think of it like a physical hedge, which acts as a barrier protecting a piece of land.
Hedging in commodities is a way to protect your investments from the negative effects of price volatility. So, when commodities are the ‘hedge’, they protect you (the land) from the negative effects of inflation (outside influences).
Inflation is what happens when purchasing power weakens because of rising prices. One of the main causes of rising prices is an increased demand in goods and services.
When there’s a rising demand for goods, more raw materials (like metals or agricultural products) are needed to produce these goods, which leads to an increase in demand and the value of these materials. This is good news if you trade on them.
3. They are a store of value
Commodities also provide additional protection for your capital by acting as a store of value.
A store of value refers to an asset that usually retains its value over time, without being significantly affected by economic or natural disasters. Precious metals are considered a store of value, or safe haven investments, as they have generally retained their value over the years.
Take gold and silver for example, which have been traded for thousands of years and are still considered valuable commodities today. The value of gold increases even in failing economies thanks to increasing demand as people rush to store their wealth in a safe asset.
4. They offer opportunities in a volatile market
The commodities market is highly volatile, with huge price fluctuations that can sometimes happen unexpectedly. Some might consider high volatility as a disadvantage when trading — for example, when prices drop rapidly and you’re left with an asset that isn’t valuable anymore.
However, on Deriv, you can trade CFDs (contracts for differences) and options on commodities, which allows you to trade on price movements without owning the physical asset. All you have to do is speculate on an asset’s price movements — whether it’ll go up or down — and earn a payout if the market moves according to your prediction.
This opens up plenty of exciting opportunities as a commodities trader to potentially gain from significant price fluctuations. Plus, you’ll be able to benefit from both rising and falling prices, as long as the price moves according to your prediction.
However, it is important to note that a balanced portfolio or a highly volatile market doesn’t guarantee profits or protection against losses. Just like when you trade in any other market, trading commodities comes with its own risks and the market can be significantly affected by unpredictable events.
Read our tips for trading in the commodities market before you get started. Or sign up for a free Deriv demo account now to explore the commodities market risk-free with virtual funds.
Disclaimer:
The information contained in the Blog is for educational purposes only and is not intended as financial or investment advice.
Options trading on Deriv Trader is unavailable for clients residing within the EU.