In the realm of financial asset classes, commodities hold significant prominence alongside other groups like equities, bonds, indices, and real estate.
As a result of the global pandemic and the Russia-Ukraine conflict over the last few years, there has been a notable escalation in commodities’ costs, particularly in food and energy prices, reaching levels that approach historical peaks. Further, these price surges have been exacerbated by significant disruptions in supply chains, leading to heightened volatility in the domain of commodity prices.
Nonetheless, several brokers like FirstInvestCapital incorporate commodity CFDs to allow their traders to take advantage of both market directions and secure their portfolios. Note that “shorting” the market provides you with additional financial opportunities, and it can be a valuable tool for traders seeking to capitalize on market downturns.
The situation of the commodity market nowadays
Various legumes in pouches
According to the latest report, the World Bank predicts a decline of 21% in commodity prices for 2023 compared to the previous year, with energy prices expected to drop by 26% during this period. Specifically, the average price of Brent crude oil is anticipated to decline per barrel, marking a 16% decrease from the average in 2022.
But these projections offer little solace to consumers in numerous countries. In real terms, the cost of food commodities could persist at one of the highest levels witnessed over the past five decades.
Moreover, despite the considerable declines anticipated this year, prices for all major commodity groups will probably still remain significantly higher than the average levels observed from 2015 to 2019. Notably, European natural gas prices could linger at nearly three times the average recorded during the 2015-19 period, while energy and coal prices could also surpass the levels seen prior to the pandemic.
Why invest in commodities?
From the investment perspective, commodities can offer reliable opportunities to interested individuals. Investors typically seek to incorporate commodities into their investment strategy to achieve three primary advantages – safeguarding against inflation, enhancing diversification, and unlocking high potential returns.
Historically, commodities have displayed distinct behavior compared to stocks and bonds, exhibiting independent movements—meaning their performance does not closely align with traditional investments. This lack of correlation with other assets makes commodities a valuable tool for mitigating inflation risks, as their prices tend to surge during periods of rising inflation.
Evidence from the period between 1970 and 2015 also reveals that the Bloomberg Commodity Index’s annual returns demonstrated a minimal correlation with US stocks. This divergence between commodities and stocks/bonds further underscores the notable advantage of commodities exposure, i.e., diversification. Note that in a well-diversified portfolio, multiple asset classes tend to move independently of one another, thereby reducing overall portfolio volatility.
However, investors and traders should always remain prepared to customize their strategies as per shifting market conditions. On this note, First Invest Capital is a reputable broker that extends the option of commodity CFDs trading to its clients, allowing them to benefit from the flexibility of adapting their strategies and trade across various timeframes. The broker accommodates a broad scale of advanced trading tools and features to perpetuate a secure and optimal environment.