Living a good life rests upon some measure of stability. And one of the central pillars of such stability is getting one’s finances organized to protect against a precarious existence.
More and more people today seek to augment their incomes and future financial security by trading commodities. For the interested novice, here’s a guide to everything you need to know to get started, with a specific emphasis on a particular class of commodities: precious metals trading. More in-depth guidance can be found on expertly-compiled information websites like AskTraders, whose regularly updated content is compiled by a strong team of seasoned professional traders.
The animal kingdom may live in a world of unnamed things and contingent events, but humans, possessing language and the ability to endow their world with meaning, live in a world of values, ranging from the ethical to the material. As a result, for us, many of the “things” that animals consume to live are better described as value-laden “commodities” – naturally occurring or agriculturally-produced materials that, through human efforts or labor (like mining, purification, crop cultivation, animal husbandry, farming, etc.), take on quantifiable ‘exchange value.’
In other words, we can use commodities to trade in the form of exchange: we want a commodity that has value for us that someone else has, so we offer some other commodity of value to them in exchange.
Since humans need some degree of stability (which includes predictability) to live well, trading took on a particular characteristic that dates to the 19th century. Developed by farmers, a system of “forward contracts” was devised – a kind of pact in which a purchaser and a producer (say, a buyer and a farmer who is producing wheat crops) agree on a specific price for delivery at a future date.
To further diminish the risk to both parties, this agreement typically included a partial “down payment,” pledging the buyer to the prospective purchase and incentivizing the producer to deliver the goods on time. Today, this payment is known as a “margin,” with the rest of the payment being made upon delivery of the product. The risk of non-delivery is thereby reduced, as is the prospect of non-payment: a measure of predictability and stability is introduced for both parties.
Today, this kind of “futures” trading takes place in carefully controlled and regulated trading environments or “platforms” presided over by organizations like the Chicago Board of Trade.
The top categories of commodities currently traded in marketplaces worldwide include Energies (oil, gas, etc.), Crops, Livestock, Base (industrial) Metals, and Precious Metals. There are others, too, but these are the main ones.
To focus on precious metals, gold, silver, palladium, and platinum – comparatively rare metals characterized by naturally inherent properties like resistance to oxidation and corrosion. Throughout history, they’ve been used for currency and jewelry. Base metals are more commonly occurring, more susceptible to corrosion and oxidation, and therefore less “precious” in value. However, they’re widely used to make crucial commodities like copper pipes, wires, and alloys. They include copper, lead, nickel, and zinc.
The underlying principles of commodity trading are similar for all commodities, however. As Forbes advisor David Rodeck puts it, “… investors make bets on the expected future value of a given commodity. If they think the price of a commodity will go up, they buy certain futures — or go long — and if they think price the commodity will fall, they sell off other futures — or go short.”
Traders will often turn to precious metals, especially gold, to invest in as a hedge when economic conditions are turbulent. Though determined by market sentiment on a 24-hour-a-day basis, the value of gold is less susceptible to fluctuations in supply and demand than other commodities. It’s regarded as a safe store of value, especially when banks, money and political climates are seen as unstable. Traders tend to hoard gold at times of upheaval and turbulence.
Unlike other commodities, traders and investors will, on occasions, take possession of physical quantities of precious metals in the form of ingots, coins, or jewelry. The strategy only pays off for commodities like these that are inherently laden with value.
The main trading “vehicles” for precious metals take the form of Contracts for Difference (CFDs), Exchange Traded Funds (ETFs), and Over The Counter (OTC) products, but they can be bought and sold in physical form, too, because of their value-dense properties. Numerous institutions purchase precious metals, including central banks (for their reserves), investment banks, investment funds, corporate consumers (and producers), and retail traders and operators. There are plenty of buyers out there, in other words.