What does a Commodity Trader do?
Everything you need to know about the role, strategies, risks and do all traders get up at 5am 👀
Hey everyone 👋 ,
Jason here. I hope you’ve had a good week so far!
Something I've talked about before that annoys me a bit about the finance industry (and many other industries for that matter), is the sense that some roles are almost impenetrable and hostile to outsiders. One role that I think fits right into that bracket is 'commodity trader'.
So today, let’s get to grips with what on earth they do and more importantly, how what they do might matter to you!
PS do they all get up at 5am? Well this one does (interesting read on a day in the life of a analyst working in crude oil trading - a type of commodity, more on that below).
Today I’ll cover:
Commodity trader. A quick explanation📝
A deeper dive into commodities trading: why it matters to you
Types of commodities traded 🫱🏽🫲🏼
What moves commodities prices?
Managing risk in commodity trading ⚖️
📹 Explanation
🔑 Terminology worth knowing
Useful tools 🛠️
Quickly Explained
Ever wondered what a Commodities Trader is?
Imagine someone who spends their days playing a high-stakes game of Monopoly, but instead of buying properties, they're trading in stuff like gold, oil, wheat, and yes, even those coffee beans powering your espresso machine.
Their goal? To predict how global events will affect market prices, aiming to buy low and sell high, all while navigating the ever-changing winds of the global economy.
A deeper look and why it matters to you 🤔
Commodity traders aren't just making bets on physical goods and it's not just about making money; their actions help determine how much you pay for a lot of the products you use every day.
They're constantly tuned into the world's happenings. They keep an eye on everything from weather forecasts (because a bad storm could mean less wheat to go around, for example) to political news (since big decisions can affect oil prices). They use all this information to predict whether prices will rise or fall, making their trades based on these educated guesses.
But it’s not just a solo act. They're part of a bigger picture, helping farmers, miners, and energy companies manage the risks of price swings. By locking in prices for the future, they give these producers a bit more predictability in a very unpredictable world.
So, the next time you hear about commodity prices going up or down in the news, you’ll know there’s a commodities trader out there, making moves and shaping the market. They're the behind-the-scenes players in a global theater, ensuring that the world's resources get to where they need to go, all while trying to score a win in the complex game of commodities trading.
Types of Commodities Traded 🫱🏽🫲🏼
Delving into the commodities market is like exploring a market, where each stall offers goods vital to our daily lives and the global economy. This market is vast and varied, with each commodity requiring a specific strategy to navigate its unique challenges and opportunities.
Energy Commodities: think oil, natural gas, and coal – the lifeblood of our global energy needs. These commodities power our homes, vehicles, and industries. Their prices can be particularly volatile, influenced by geopolitical events, changes in regulations, and technological advancements.
Metals: precious metals like gold and silver have been coveted for centuries, not just for their beauty but as hedges against inflation and economic uncertainty. Industrial metals like copper and aluminum are essential for construction, electronics, and manufacturing, with demand often tied to economic growth.
Agricultural Products: from the wheat in our bread to the soy in numerous products, these commodities are the backbone of the global food supply. Their prices are influenced by weather patterns, harvest reports, and changes in consumption habits.
Each commodity market has its rhythm, influenced by seasonal cycles, technological advancements, and shifts in consumer preferences. Traders must be adept at reading these signs, ready to pivot their strategies in response to new information.
Here’s the current price of gold for example:
Gold prices have recently hit record highs. And part of this is driven by investor fears over tensions in the Middle East and speculation that US federal reserve will cut interest rates.
What Moves Commodities Prices? 🧐
Let’s pretend you’re planning a wedding in the next year but need to know if the price of the venue or catering will go up in the next few months. Commodity traders are doing something similar—they keep tabs on everything that could change prices, like unexpected weather ruining crops or a country suddenly buying up tons of oil.
Weather Events: droughts, hurricanes, and other severe weather conditions can significantly impact agricultural outputs or energy production, leading to surges or drops in prices.
Geopolitical Events: conflicts, trade agreements, and political instability can disrupt supply chains and alter the global supply and demand dynamics, affecting commodity prices.
Market Sentiment: fuelled by news reports and investor speculation, market sentiment can influence prices beyond the physical supply and demand factors, requiring traders to stay informed and ready to respond.
Managing Risk in Commodity Trading ⚖️
Here’s where it gets interesting. Trading commodities is like adding hot sauce to your food; it’s all about finding the right balance. Too little, and you’re missing out; too much, and you’re in trouble. Traders use a bunch of tools to keep their risks in check, kind of like having a recipe to follow so that hot sauce doesn’t overpower the dish including:.
Diversification: spreading investments across various commodities or financial instruments to mitigate the impact of poor performance in any single market.
Futures Contracts: allowing traders to lock in prices for future delivery, providing some level of predictability in volatile markets.
Options Trading: offering mechanisms to hedge against price fluctuations, without the obligation to buy or sell at predetermined prices, requiring a deep understanding of market mechanics.
📹 Commodities Trading…in 90 seconds
🔑 Terminology Worth Knowing
Leverage: leverage is when you borrow money (rather than use just your own money) to undertake an investment, project, or acquisition.
Margin: think of it as the entrance fee 🎟️ to the trading game. It's money you put down to show you can cover any losses.
Hedgers: these are the safety-first folks in trading. They use contracts to lock in prices, aiming to avoid unexpected cost spikes.
Speculators: The adventurers 🚀 of the market, betting on price changes to make a profit. Very high risk and often very high reward!
CFTC (Commodities Futures Trading Commission): They're the market's referees 🤵♂️, keeping the game fair and protecting participants.
Spot Price: What you'd pay for a commodity right now. It's the current market rate, no waiting involved.
Contango: When future prices are higher than current ones, often due to storage costs. It's paying more now to get something later.
Backwardation: The reverse of contango; future prices are lower than today's 📉. It's like finding future deals at today's prices.
🛠️ Useful Tools
If you’re eager to explore the world of commodities trading further, there are a bunch of useful online tools designed to provide further insights, here’s a few to start:
Bloomberg Commodities: for latest market trends and price updates.
Reuters Commodities: deep dives into the news affecting global commodity markets
Thank you for sticking with me through this deep dive into commodities trading 🙏 if you found this helpful and enjoyed the post, I’d be super grateful if you could hit the ❤️ below - thank you!
DISCLAIMER: None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.