Commodities Trading: Markets, Contracts, and Strategies

The Market That Moves Before the Stock Market Opens

In March 2022, natural gas futures spiked 28% in a single day following Russia's invasion of Ukraine—before most equity markets had fully priced the event. Commodity markets are the raw nerve endings of the global economy. When food, fuel, and metals move, everything else follows. The global commodity market processes roughly $20 trillion in transactions annually, dwarfing most equity markets.

What Commodities Are Traded

Commodities fall into two main categories:

• Hard commodities: Mined or extracted natural resources—crude oil, natural gas, gold, silver, copper, aluminum, iron ore, coal
• Soft commodities: Agricultural products—corn, wheat, soybeans, coffee, cocoa, sugar, cotton, live cattle, lean hogs

Each has its own exchange, contract specifications, and seasonal patterns. Crude oil trades primarily on the New York Mercantile Exchange (NYMEX) and ICE Futures. Agricultural products trade on the Chicago Mercantile Exchange (CME). Gold and silver trade on COMEX, a division of the CME Group.

Spot Markets vs. Futures Markets

Most commodity trading happens in futures markets, not spot markets. A futures contract obligates the buyer to purchase (and the seller to deliver) a specific quantity of a commodity at a predetermined price on a specific future date. A WTI crude oil futures contract covers 1,000 barrels of oil. A COMEX gold contract represents 100 troy ounces.

Contango vs. Backwardation

These two terms describe the shape of the futures curve—how prices change across delivery dates.

Contango means future prices are higher than spot prices. This is normal for commodities with storage costs. Oil markets are typically in contango. When investors hold commodity ETFs that roll futures monthly, contango creates a "roll cost" that erodes returns even when commodity prices rise.

Backwardation means futures prices are below spot prices—often signaling supply tightness. Backwardation is common in natural gas during cold snaps and in agricultural markets during droughts.

Who Trades Commodities and Why

• Producers: Oil companies, farmers, and miners sell futures to lock in prices and protect revenue
• Commercial users: Airlines hedge jet fuel costs; food manufacturers lock in grain prices
• Speculators: Hedge funds and prop traders take directional bets on price movements
• Arbitrageurs: Exploit price differences between related markets or delivery points
• Retail investors: Gain exposure through ETFs, ETNs, or commodity stocks

Major Commodity Benchmarks

How Retail Investors Access Commodities

Direct futures trading requires a margin account and substantial knowledge. Most retail investors access commodities through:

• Commodity ETFs: SPDR Gold Shares (GLD), iShares Silver Trust (SLV), United States Oil Fund (USO)
• Broad commodity ETFs: Invesco DB Commodity Index Tracking Fund (DBC), iShares GSCI Commodity Dynamic Roll Strategy ETF
• Commodity stocks: Shares of Exxon Mobil, Freeport-McMoRan, Archer-Daniels-Midland
• Commodity mutual funds: Pimco CommodityRealReturn, DWS Enhanced Commodity Strategy

Commodities as Portfolio Diversifiers

Between 2000 and 2009, the S&P 500 lost approximately 9% cumulatively. The Bloomberg Commodity Index gained roughly 150% in the same period. This negative correlation during equity bear markets is why institutional portfolios typically allocate 5%–10% to commodities. Gold in particular has historically served as a hedge against inflation and currency debasement—its price rose from $255 per ounce in 2001 to over $2,400 in 2024.

Disclaimer: Commodities trading involves substantial risk of loss. Futures contracts are leveraged instruments and may not be appropriate for all investors. This article is for informational purposes only. Consult a qualified financial advisor before trading commodities.