Spreading the Coronavirus, its surrounding circumstances, and the results had an important impact on almost everything. Either, it had an impact on the commodity markets.
What are the commodity markets? What is their importance and meaning in the marketplace? What were the significant changes that were caused by a coronavirus in the commodities’ marketplace, and what lessons can we learn from history?
Until we go to the depths let’s answer the basic questions.
What is the commodity market?
We can say that the commodity market is one of the oldest markets. Trading with commodities started about in the 18th century in Japan and soon it spread around the world.
Nowadays, the commodity market is popular with traders. The commodity market allows them to trade with primary goods, such as crude oil, cotton, rubber, grains, metals, minerals, and so on. Mostly, traders are trading with commodities in a virtual way, which seems for them more profitable. The main importance of trading with commodities is that prices are fluctuating from time to time, which is dependent on the demand and supply law, so traders have a chance to buy commodities at a low price and sell them after the prices go up.
Coronavirus impact on the commodity markets
Coronavirus had a huge impact on the markets and either on the commodity markets. During the coronavirus pandemic, the states’ governments for preventing the spread of the virus decided to stop transportation. Stopped transportation all around the world caused the sharp reduction of the demand for oils. And finally, the decreased demand for oil led us to the dramatically lowered price of the mentioned commodity.
The drastic changes in demand, made companies sell their resources at negative prices. Even though the prices were negative, the demand for the resources wasn’t increased at a higher rate. What was its real reason?
Commodity suppliers don’t ensure traders with lubricant storage. So, as costs of commodities became negative, the storage prices went too high. Most of the traders weren’t able to buy lubricant storages, so they made an optimal decision. They decided to start commodity trading via FX brokers, which allows traders to enter into a contract for differences. The contract of differences is a contract that involves an agreement between two people. One part of the contract is a buyer and the second part is a seller. The main idea of the contract of the difference is that, at the end of the contract, the seller and the buyer are exchanging the difference between the opening and closing prices of a certain financial instrument, including commodities.
Furthermore, not only the prices of oil but also most of the commodities’ values went down. For example, the platinum’s price went down by 25%, the coal’s value decreased by almost 25%, the cost of natural rubber, also, has reduced by almost 25%, and the natural gas price has dropped by 23%.
But on the second hand, as the prices of almost all the commodities went down, the price of gold has increased by approximately 8%. That was because of the expecting global economic crisis, where the fiat money loses its value. So, it can be the main reason as well why digital currencies, especially Bitcoins at this rate, have progressive growth in their value.
What will be in the future?
Experts are saying that Coronavirus will have an impact on the markets not only in the short but in the long term.
The effect will be especially dramatic for agricultural resources because of the movement restrictions and the regulations about transportation.
If Coronavirus will continue to spread and governments will continue to regulate transportation and stuff like that, the result of the Coronavirus won’t be positive. But as the vaccination processes are taking place all around the world, there is hope that soon, countries will be able to start developing from the rate they were until COVID-19’s spreading.
Advantages of commodity trading
One of the significant advantages of commodity trading is that it protects traders against inflation. During inflation, almost in every case, the interest rate rises and as well the demand on the commodities. So it means that inflation has a good impact on the commodity market and allows traders to sell their products at a high price and see a profit.
As we know geopolitical events have an influential effect on almost every market. While there are commodity markets, which are the hedge against risky geopolitical events. Those risky events are the catalyst of rising prices on commodities. So, people are investing their money in commodities and wait for a suitable moment to trade with them.
One of the most key advantages of commodity trading is its transparency. Being involved in commodity trading means that there is less chance to be a victim of fraud and scam and therefore, to lose your money or earned profit.
To conclude, Coronavirus has a drastic effect on the commodity market. But even though, for many people these droppings were unprofitable, there were also many people, especially those who entered into the contract for difference, who earned a lot of money and saw a significant profit.