A futures market trading floor is sometimes depicted as a scene of absolute chaos, replete with violent screaming matches, frantic hand signals, and tense dealers scrambling to satisfy their orders. Meanwhile, customers and sellers come here to exchange various goods through trading commodities. And the current list of commodities includes agricultural products, metals, petroleum, financial instruments, and stock indexes traded on a commodity market.
At the center of this seemingly disorderly scenario are products that give a haven, a hedge against inflation. Prices of commodities typically rise when inflation increases, protecting consumers from the impacts of increasing inflationary costs. As such, few assets profit from rising inflation, particularly unanticipated inflation, but this is not always the case. The prices increase when there is an increase in demand for a product or service and the price of the raw materials needed to produce it. Therefore, futures markets maintain the most up-to-date supply and demand data in a continuous auction and clearinghouse.
Forecast for the Commodity Market
Investors may shift their attention to trading commodities if the stock market experiences sudden and unexpected changes. The likelihood of significant price shifts in some things, such as precious metals, is relatively low. Consequently, investments in the commodities market are secure and provide investors wary of taking risks, a defense mechanism against inflation.
Prices are predicted to be much higher in 2022 than in 2021 for most commodities and will stay elevated in the near term. As such, Brent crude oil might reach $100 per barrel in 2022, up 42% from 2021 and at its top level since 2013. In 2022, non-energy costs may climb by nearly 20%, while the prices of wheat are likely to soar by more than 40%, hitting an all-time peak in relative terms. While prices will likely rise in 2022, they will remain significantly higher than initially predicted.
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Investing In Commodities Makes Sense
Commodity market investment is essential for the following reasons:
Diversification
Commodities market returns are inverse to stock and bond market returns because stock and bond market returns collapse as product prices rise. Commodities may provide investors with a high return on investment (ROI) even during a slump in the stock market, enabling them to make up for lower or negative returns in the capital sector.
Anti-Inflationary Measures
Gold prices tend to grow more quickly than inflation rates in a nation, enabling investors to profit from an increase in the value of their corpus investment. And since certain things (such as gold, crude oil, and so on) have a steady demand over time, their price graphs show a linear increase over time, removing any unsystematic fluctuations in the long run. Hence, commodities may be profitable if you have a long-term time horizon.
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Investing’s Returns
While certain commodities are known for their stability, others are volatile, depending on economic and capital market conditions. Oil is a classic example of a flammable product whose price changes due to supply variations, mining difficulties, or socio-economic variables. And based on their market projection, price volatility attracts commodity speculators, who may go long or short on their positions.
Real-return bonds and commodities (as well as offshore bonds and property) are popular asset classes for investors looking to safeguard their capital’s purchasing power during excessive inflation. Trading commodities and various asset types are included in investors’ portfolios to give varying degrees of downside protection and upside possibilities. However, you must responsibly conduct your commodity trading to achieve your investment goals.
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