Introduction to Commodity Investment: Master These Types and You're Good to Go

Commodities are an important asset class in the global capital markets, alongside stocks and bonds. Compared to traditional financial assets, they are directly linked to economic activity and daily life, with price fluctuations often accurately reflecting economic cycles. Therefore, they have become a key allocation focus for institutional and individual investors.

What Sectors Do Commodities Cover?

Commodities refer to large-volume physical goods that enter circulation but are not sold at retail. They are characterized by large supply, demand, and circulation volumes, typically situated upstream in the industrial chain. Based on their attributes, they can be divided into six major categories.

Energy Commodities include crude oil, gasoline, fuel oil, natural gas, and electricity. Among these, crude oil is the most critical—its supply and demand are enormous, with downstream applications spanning clothing, food, housing, and transportation. Plastics are used for food packaging, PTA for making textiles, PVC for flooring and pipes, and gasoline for transportation. It can be said that crude oil is the true “King of Commodities.”

Industrial Metals mainly include copper, aluminum, lead, zinc, and iron ore, widely used in manufacturing.

Precious Metals include gold, silver, palladium, and platinum. Compared to industrial metals, precious metals are less prone to corrosion and easier to store, giving them monetary properties and hedging functions.

Agricultural Products cover major global food crops such as soybeans, corn, and wheat.

Soft Commodities refer to daily necessities like sugar, cotton, and coffee.

Livestock Products include pork, beef, and other protein commodities.

Which Commodities Should Investors Choose?

Faced with a wide variety of commodities, investors need to filter based on investment criteria. Not all “big” commodities are suitable for investment—although energy has large supply and demand, regional restrictions and lack of global pricing uniformity make it less ideal for most investors.

Characteristics of high-quality commodities should include:

First, ample liquidity. The commodity must attract significant capital participation to enable proper pricing and prevent manipulation. Crude oil, copper, gold, soybeans, and corn all meet this criterion.

Second, global price uniformity. The same commodity listed on multiple exchanges worldwide allows investors globally to buy and sell at a unified market price, eliminating regional arbitrage. Crude oil and gold are typical examples.

Third, ease of storage and transportation. Metals and grains are less affected by climate and regional restrictions, facilitating storage and circulation.

Fourth, standardized quality. Gold, crude oil, and other commodities are rigorously certified regardless of origin, ensuring fair trading.

Fifth, stable and broad demand. There is a long-term global demand for energy, food, and other commodities.

Sixth, fundamentals are easy to analyze. Investors can access sufficient information to judge price trends based on economic logic, rather than relying solely on technical analysis.

Based on these standards, the key commodities to watch include: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton.

Core Logic for Timing Investment Opportunities

Commodities are globally priced assets, and the best investment opportunities arise when major economies’ cycles resonate. For example, in 2020, after the outbreak of the pandemic, global central banks implemented quantitative easing, leading to liquidity flooding and inflation expectations. Against this backdrop, commodities experienced a significant broad-based rally.

How to Participate in Commodity Investment

Commodity investment methods are divided into physical investment and derivatives trading. The former includes spot trading, mining, and logistics investments, which have higher entry barriers for individual investors. The easier approach is derivatives trading, mainly futures and options.

For beginners, commodity futures are the first choice. Each futures contract has a clear underlying—crude oil futures correspond to crude oil, copper futures to copper, etc. Investors need to clarify three key elements: what is the underlying asset, when does the contract expire, and what are the expectations for the spot price in that month.

The core of futures pricing is predicting future spot prices. Influencing factors mainly include macro-economic conditions and industry supply and demand, known in the industry as fundamental analysis. Fundamentals determine the direction and magnitude of price movements.

In addition to fundamentals, investors should also incorporate technical analysis. Both are essential—fundamentals need technical confirmation to identify precise entry and exit points; technical analysis requires fundamental guidance to assess trend persistence and volatility. The organic combination of fundamentals and technicals is the winning approach.

Summary

Commodities are a major asset class alongside stocks and bonds. Participating in commodities essentially involves re-pricing the global industrial chain. From a practical perspective, the correct approach is to combine fundamental and technical analysis, focusing on mainstream futures with good liquidity, global pricing, and driven by fundamentals.

Key commodities to focus on include: crude oil, copper, aluminum, gold, silver, soybeans, corn, sugar, and cotton. These assets have ample liquidity, transparent pricing, and clear fundamental drivers, making them suitable for systematic investment.