What Are Commodities? Trading Raw Materials
Commodities are raw materials like gold, oil, and wheat traded on global exchanges — this guide covers the major categories and how traders access them.
What Are Commodities? Trading Raw Materials
A commodity is a basic physical good — gold, oil, wheat, copper — interchangeable with other units of the same grade and traded on global exchanges.
Before stock markets, there were commodity markets. Grain, metals, and energy have been traded for thousands of years. Today they're a multi-trillion-dollar asset class that every trader should understand — commodities drive inflation, currencies, and the stocks of countless companies.
What is a commodity?
A commodity is a raw material or primary agricultural product that is standardized and interchangeable. One ounce of 99.9% pure gold is the same whether mined in Australia or South Africa — that uniformity is what makes commodities tradable on exchanges.
The key quality is fungibility: any unit is equivalent to another of the same grade. This distinguishes commodities from manufactured goods, which vary by brand and quality.
Major commodity categories
| Category | Examples | What drives them |
|---|---|---|
| Precious metals | Gold, silver, platinum | Inflation, rates, risk sentiment |
| Energy | Crude oil, natural gas, gasoline | Supply geopolitics, demand cycles |
| Industrial metals | Copper, aluminum, nickel | Economic growth, construction |
| Agriculture | Wheat, corn, soy, coffee | Weather, harvest cycles |
| Livestock | Cattle, hogs | Feed costs, demand |
| Softs | Coffee, cocoa, sugar | Weather, consumer demand |
How commodities are traded
Futures contracts
The dominant way institutions trade commodities. A futures contract obligates the buyer to purchase (or seller to deliver) a set quantity at a future date.
- Standardized by exchange (CME, ICE, LME)
- Use leverage — small margin controls large notional
- Roll positions before expiry
- Complex for beginners — spreads, contango, backwardation
ETFs and ETCs
Exchange-traded funds that track commodity prices — the easiest way for retail traders to get exposure.
- No futures account required
- Trade like stocks
- Examples: GLD (gold), USO (oil), COPX (copper)
- Some use futures (roll costs) or physical holding
CFDs and spread betting
Popular outside the US. Trade price changes without owning the underlying.
- High leverage available
- Counterparty risk with the broker
- Often restricted or banned in some jurisdictions
Physical
Buying actual metal or goods — practical only for small amounts of gold or silver. Not viable for oil or grain.
What moves commodity prices
- Supply shocks — geopolitical events, OPEC decisions, weather
- Demand cycles — economic growth drives industrial metals and energy
- Currency moves — commodities are priced in USD; weak dollar = higher prices
- Inflation — commodities are an inflation hedge
- Interest rates — higher rates raise storage costs and lower prices
- Seasonality — natural gas, grains, heating oil follow seasonal patterns
Why traders care about commodities
- Diversification — low correlation to stocks and bonds
- Inflation hedge — commodities rise when fiat loses value
- Macro signals — copper predicts economic growth, gold signals fear
- Currency connection — commodity-exporting currencies (AUD, CAD) follow prices
- Volatility — supply shocks create trading opportunities
Risk management for commodities
- Use stop-losses — commodities can gap on news (OPEC, weather)
- Mind leverage — futures are highly leveraged
- Watch contract expiries — avoid unwanted delivery
- Understand roll costs — futures-based ETFs bleed value in contango
- Track the US dollar — it's the denominator for most commodities
How to start
- Learn the major gold and oil markets first
- Trade commodity ETFs before futures
- Track the US Dollar Index — it's the master variable
- Read supply/demand reports (EIA, USDA, World Gold Council)
- Start small — commodity volatility surprises equity traders
Common beginner mistakes
- Trading futures without understanding contract specs
- Ignoring the dollar's effect on prices
- Holding futures ETFs long-term through contango
- Underestimating weather and geopolitical risk
- Treating commodities like stocks — they have no earnings
Bottom line
Commodities are the raw building blocks of the global economy. They diversify a portfolio, signal macro shifts, and offer unique trading opportunities. Start with the largest, most liquid markets — gold and oil — and build your understanding from there.