What are commodities? Gold, oil and more
โ๏ธ TradeAcademy๐ Basicsโฑ๏ธ 2 min read
Commodities are raw materials that are traded in bulk: the oil in your car, the gold in jewellery, the wheat in your bread. One barrel of Brent crude is the same as any other barrel of Brent, which is what makes them tradeable on standardised markets.
The four main groups
| Group | Examples | What drives prices |
|---|---|---|
| Precious metals | Gold (XAU), silver (XAG), platinum | Interest rates, the US dollar, fear and inflation |
| Energy | Brent and WTI crude oil, natural gas | OPEC+ decisions, inventories, wars, the economy |
| Industrial metals | Copper, aluminium | Factory activity, especially in China |
| Agriculture ("softs" and grains) | Wheat, corn, soybeans, coffee, sugar, cocoa | Weather, harvests, exports |
Gold: the commodity most traders start with
Gold (XAU/USD) is quoted in US dollars per troy ounce and is by far the most traded commodity among retail traders. It moves a lot, it trades almost around the clock and it reacts clearly to news. At most brokers 1 lot = 100 ounces, so a $1 move in price is worth $100 on 1 lot and $1 on 0.01 lot. We explain what moves it in what moves gold.
Oil: two benchmarks
- Brent (North Sea) is the global benchmark, used for most of the world's oil.
- WTI (West Texas Intermediate) is the US benchmark.
Oil reacts to OPEC+ production decisions, the weekly US inventory report (Wednesdays) and geopolitical events. Moves of 3โ5% in a day are not unusual.
How retail traders trade commodities
You won't take delivery of a barrel of oil. Retail traders use:
- CFDs (most common): you trade the price movement only. Some commodity CFDs follow futures contracts that expire; your broker either rolls them over (sometimes with a price adjustment) or closes your position at expiry. Check your broker's contract specifications.
- ETFs and stocks of producers (gold miners, oil companies) for longer-term investing.
In the EU, leverage for retail clients is capped at 1:20 on gold and 1:10 on other commodities. Commodity CFDs often have bigger overnight swap costs than forex.
Three things that catch beginners out
- Contract size differs per commodity and per broker. 1 lot of oil might be 100 or 1,000 barrels. Always check before you trade.
- Trading hours are shorter than forex for many commodities, with daily breaks.
- Volatility is higher. Use a smaller position and a wider stop than on EUR/USD: size it from your risk.
Our free Gold Risk Management Cheat Sheet shows step by step how to size gold trades: download it here.
๐ Free: Gold Risk Management Cheat Sheet
How to size every gold trade from your risk, plus a bonus ebook on opening your account and setting up MetaTrader 5.
Disclaimer: Not financial advice. Trading involves significant risk of loss.