Comprehensive Guide to Commodity Investment: From Understanding to Deployment

What Are Commodities? Why Are They Worth Paying Attention To

Commodities, alongside stocks and bonds, have become the three main pillars of global asset allocation. They refer to large quantities of goods that are circulated but do not enter the retail sector, possess commodity characteristics, and are widely used in production and consumption fields.

Compared to ordinary goods, the notable feature of commodities is the word “large”: abundant supply, strong demand, huge circulation volume, and ample inventories, which often place them at the top of the industry chain. These characteristics endow them with a keen economic barometer function—when the global economic pulse changes, commodity prices tend to react first and foremost.

Panorama Overview: The Six Major Camps of Commodities

The commodity ecosystem includes six main categories, each with different characteristics and investment logic:

Energy Camp: Oil Reigns Supreme, Others Follow

This includes crude oil, gasoline, fuel oil, natural gas, electricity, and more. Among them, crude oil is undoubtedly the crown jewel, with supply and demand both enormous, and liquidity unmatched. Downstream applications of crude oil span all aspects of daily life: plastics for food packaging, PTA for clothing, PVC for flooring and pipelines, gasoline powering every trip. For this reason, crude oil is hailed as the undisputed king in the commodity field.

Industrial Metals Camp: The Pulse of Construction

Copper, aluminum, lead, zinc, iron ore, and other industrial metals directly reflect the heat of global manufacturing and infrastructure construction. The demand for these varieties is highly synchronized with economic cycles and often serves as a leading indicator of economic health.

Precious Metals Camp: Embodying Wealth

Gold, silver, palladium, platinum, and other precious metals differ from industrial metals in their “precious” characteristic. Their prices are far higher than ordinary metals of the same weight, and they possess excellent corrosion resistance, naturally serving as stores of value, hedges, and safe havens. During market turbulence, they often become safe havens for capital.

Agricultural Products Camp: Symbols of Food Security

Soybeans, corn, wheat, and other widely cultivated grains directly relate to global food security. Their prices are influenced by weather, policies, global inventories, and other factors, with unique investment logic.

Soft Commodities Camp: Reflecting Living Standards

Sugar, cotton, coffee, and other varieties seem related to daily life details but actually represent global consumption levels and lifestyles.

Livestock Varieties: Ensuring Protein Supply

Pork, beef, and other livestock varieties are closely linked to global protein demand.

Additionally, since most commodities are transported via sea freight, shipping indices also serve as special indicator varieties within this ecosystem.

How Investors Can Precisely Select: Six Golden Standards

Not all commodities are suitable as investment targets. For example, although electricity has large supply and demand, its limited transmission scope and regional price constraints make it less ideal for most investors. So, what kind of commodities are worth participating in?

Standard 1: Liquidity

The variety must have sufficient trading volume and capital participation. The participation of substantial heterogeneous funds ensures adequate and fair pricing, almost eliminating room for manipulation. Crude oil, copper, gold, soybeans, corn, and others meet this requirement.

Standard 2: Global Uniform Pricing

The variety is listed on multiple exchanges worldwide, allowing global traders to participate at the world market price, avoiding regional arbitrage.

Standard 3: Easy to Store and Transport

Metals, grains, and similar varieties are not prone to spoilage or deterioration, are less affected by regional or seasonal factors, and are convenient for long-term holdings.

Standard 4: Standardized Quality

Regardless of origin, quality is strictly controlled and uniformly certified, such as gold purity, API gravity of crude oil, ensuring contract deliverability.

Standard 5: Stable and Widespread Demand

There is long-term, stable, and rigid global demand for the variety. Energy (oil, natural gas) and agricultural products (wheat, soybeans) are typical representatives.

Standard 6: Fundamental Factors Are Analyzable

The influencing factors (macro economy, supply and demand dynamics) are relatively transparent and easy to access, helping investors establish a clear logical framework.

Based on these standards, investors should focus on nine mainstream varieties: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton.

The Correct Approach to Participating in Commodities: Futures and Options

Physical industry investments (trade, mining, logistics, etc.) exist but are too high a threshold for ordinary investors. Derivative investments are the more popular way to participate, mainly including futures and options.

Futures: The Most Direct Participation Channel

Futures contracts clearly define the underlying asset (e.g., crude oil futures linked to spot crude oil), expiration month, and delivery rules. Investors need to judge the spot price trend at the expiration month to make trading decisions.

Understanding the pricing logic of futures is crucial: futures prices are essentially predictions of the spot price at a future month. The core factors influencing this prediction include macroeconomic conditions and supply and demand for the variety.

Fundamental Analysis: Establishing Investment Direction

Fundamental research focuses on macroeconomic factors and industry supply and demand, which determine the direction and magnitude of price movements. For example, after the 2020 pandemic outbreak, global central banks implemented quantitative easing, and inflation expectations of “more money than goods” drove a general rise in commodities.

Technical Analysis: Precisely Grasping the Rhythm

Technical analysis uses charts and statistical indicators to help investors determine optimal entry and exit points. However, its limitation lies in difficulty predicting the duration and extent of trends.

Dual Approach: Fundamental + Technical

Effective investing often involves paying attention to the big picture of fundamentals while using technical analysis for precise position management. Fundamentals provide logical guidance for technicals, and technicals confirm the rhythm of fundamentals. The combination ensures alignment with the overall trend while effectively controlling risks.

Core Insights and Final Recommendations

The essence of commodity investment is re-pricing the global industrial chain. When major economies resonate in their economic cycles (e.g., synchronized easing by global central banks), commodities often present trend opportunities.

By integrating fundamental and technical frameworks, focusing on liquid, globally priced, and fundamentally driven quality varieties—crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton—are the right way to participate in commodities. As an important asset class alongside stocks and bonds, commodities should be a necessary component of diversified investment portfolios.