Most people think of “the market” as a collection of company logos: Apple, Tesla, Amazon. But there is an older, deeper market that does not care about quarterly earnings calls or CEO tweets. It cares about rain in Brazil, war in the Middle East, and how much gold is sitting in a vault in London. This is the commodities market. It is the raw material of the global economy, traded in a pit of volatility that makes the stock market look polite.
Commodities do not trade like stocks. A stock can go to zero if the company fails. Physical commodities represent tangible goods with ongoing utility, which means their pricing dynamics are driven by supply constraints and demand needs rather than corporate balance sheets. Because they represent physical goods, they are driven by the brutal, tangible forces of supply and demand. Trading them requires a different mindset and a different set of strategies.
The Three Kings: Metals, Energy, and Agriculture
Commodities are generally split into three main sectors, each with its own personality.
1. Precious Metals (Gold, Silver): The Fear Trade
Gold is not an industrial metal; it is often viewed as a store of value that exists outside the control of any single government.,. It tends to respond to perceptions of risk, inflation expectations, and currency strength, particularly movements in the US dollar. During periods of economic or geopolitical uncertainty, market participants often increase exposure to gold..
➖The Strategy: Gold traders watch real interest rates (interest rates minus inflation). When real rates are negative, gold shines because holding cash loses value. When real rates rise, gold often falls because it pays no dividend.
2. Energy (Crude Oil, Natural Gas): The Geopolitical Trade
Oil is the lifeblood of the modern world. Its price is dictated by a cartel (OPEC), global economic growth, and conflict. It trends beautifully but can reverse violently on a single headline.
➖The Strategy: Energy traders are obsessed with inventory data. Every week, reports show how much oil is sitting in storage. A surprise draw in inventory can send prices spiking. It is a game of supply shock versus demand destruction.
3. Agriculture (Corn, Soybeans, Wheat): The Weather Trade
This is the wildest sector. A drought in the Midwest or a flood in Ukraine can send grain prices parabolic.
➖The Strategy: Seasonality rules here. Grains have planting seasons and harvest seasons. Prices tend to be lowest at harvest (when supply is highest) and highest during the growing season (when weather risk is present). Trading “Ag” involves managing exposure to weather-driven supply risk.
Futures: The Weapon of Choice
You can trade commodities through ETFs, but the professionals use futures. A futures contract is an agreement to buy or sell a specific amount of a commodity at a specific date.
Futures offer significant leverage. A relatively small margin deposit can control a much larger notional position. . This leverage is a double-edged sword. It amplifies both gains and losses,, and even modest adverse price movements can result in substantial losses or margin calls.
The nuance of futures is the “term structure.” Futures contracts have expiration dates. If the price of future contracts is higher than the current price, the market is in “contango.” If it is lower, it is in “backwardation.” These weird words matter because they dictate whether you lose money or make money just by holding the position (the “roll yield”).
Strategy 1: Trend Following (The “Big Move” Hunter)
Commodities are famous for long, sustained trends. When a supply shortage hits, it takes time to fix. You can’t just build a new copper mine or grow a new crop of soybeans overnight. This leads to trends that can last for months or years.
Trend followers don’t care why the price is moving. They don’t read weather reports. They just use technical indicators like Moving Averages or Donchian Channels. If the price breaks out to a new 20-day high, they buy. If it breaks to a new low, they sell short. They eat small losses in choppy markets to catch the one monster trend that pays for everything.
Strategy 2: Spread Trading (The Relative Value Play)
This is for the trader who hates directional risk. Instead of betting that oil will go up, you bet that oil will outperform natural gas. You buy one futures contract and sell another.
- The Crack Spread: Buy Crude Oil, Sell Gasoline. You are betting on the profit margin of oil refineries.
- The Gold/Silver Ratio: Buy Gold, Sell Silver. You are betting on the relative value of the two metals.
Spreads are generally less volatile than outright directional positions. They isolate specific economic relationships and remove the general noise of “the market went down today”.
Strategy 3: Seasonality (The Calendar Play)
Commodities have rhythms. Natural gas demand peaks in winter (heating). Gasoline demand peaks in summer (driving season). Heating oil is cheap in July and expensive in January.
Seasonal traders look for these historical patterns. They buy natural gas in September, anticipating the winter run-up. They buy corn in early spring, anticipating the “planting risk premium.” It is not guaranteed (a warm winter can crush natural gas prices) but they are used to frame probabilities, not outcomes..
The Reality Check
Commodities trading is not for the passive investor. It is a high-maintenance relationship.
- Volatility is extreme. Limit up/limit down days (where trading is halted because the price moved too much) are real risks.
- The news cycle is 24/7. A pipeline explosion in Nigeria or a strike in Chile happens while you sleep.
- Leverage kills. The most common mistake is trading too big. In futures, position sizing and margin management are critical to managing downside risk.
Commodities are the rawest form of trading. There are no earnings reports to massage, no CEOs to spin the narrative. There is only the brutal truth of how much stuff the world has, and how much it needs. It is the ultimate arena for the macro trader.
Final Reminder: Risk Never Sleeps
Heads up: Trading is risky. This is only educational information, not an investment advice.