The use of futures to invest in commodities

Raw materials, also known as commodities, are interesting financial assets. Investing in them is a good alternative to make savings grow.

Why

invest in

commodities

? First of all, it constitutes a protection mechanism in economic scenarios that might seem adverse to other investments. For example, if a geopolitical conflict or a sanction on an oil-producing country causes a shortage in the world's oil reserves, the price of the barrel will rise. Those who have bought oil before this incident will benefit if they decide to sell, and these instruments have the capacity to smooth the volatility of a portfolio composed of several assets that do not usually move in the same direction.

To return to the previous example, a drop in oil barrel production could have a negative impact on the price of the shares that an investor holds in an oil company, but it could drive an increase in the value of the commodity itself. Therefore, losses in shares will be compensated by gains in commodities, but it is not necessary to wait for an energy crisis to enjoy the benefits of this investment instrument. Inflation has been a natural trend in the world economy for many years. This phenomenon, which consists of a generalised and sustained increase in prices, is accompanied by an increase in the price of raw materials.

In fact, it is usually the increase in the cost of commodities that causes inflation, and these elements are almost inseparable from each other.another trend in the world economy that favours investment in commodities is the growth that emerging economies around the world are experiencing. In many developing nations, there is accelerated migration from rural to urban populations. The result is an increased demand for commodities for infrastructure construction, commodity transportation and consumer goods production.

How to invest in commodity futures markets

? A good way to generate profits when investing in commodities is to buy futures contracts. This agreement obliges the buyer to pay a fixed price for the commodity and the seller to make delivery on a certain date.

Most people who do business on this platform do not really want to own the commodity. Except for some precious metals, which are sold in bullion and are easy to store, transport and store large quantities of raw materials would cancel out any profit. What investors in this market are looking for is to make a profit by selling the contract at a higher price, before the expiry date. Of course, this is a gamble, as the value of the commodity could decrease and generate losses.

Although it is not possible to predict infallibly the behavior of commodities, experienced investors know how to interpret certain variables that generally predict an increase or decrease in the price of commodities. The key to increasing profits and cushioning losses is to know when it is the right time to buy and sell. Most experts recommend investing in energy-related commodities such as oil and natural gas, and in precious and industrial metals such as gold, silver, copper and platinum.

Sarah Smith
Sarah Smith

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