Commodity Trading - Popular Trend of the Future

Data compiled from commodity exchanges worldwide showed that commodity trading contracts regained strong growth momentums, particularly in 2010. Contracts increased more than 47 percent in three years from 2008 to 2010. This growth presents the confidence of investor who consider commodities as a safe asset and the popular option because of their liquidity. Vietnam also established the Vietnam Commodity Exchange (VNX) in Ho Chi Minh City. VNX, functioning as a centralised commodity exchange, lists quoted prices of commodities. This is considered an attractive commodity trading channel in the future.

 

At present, commodities are the second transaction channel after securities. The number of contracts increased rapidly from 2009 and tended to rise higher than the securities channel in 2010. Tradable commodities include energy (crude oil, gas and gasoline), metals (gold, silver, platinum and copper), livestock and meat (lean pork, belly pork and living cattle), agricultural products (maize, soybean, barley, rice, cocoa, coffee, cotton and sugar).

 

According to statistics, assets managed by global commodity exchanges increased dramatically and total capital flows exceeded US$60 billion in 2010. Investment funds spent much on safe havens, including commodities and crude materials. Asia-Pacific has the biggest commodity contracts.

 

In Vietnam, the Ministry of Industry and Trade granted licence for the formation of the Vietnam Commodity Exchange (VNX). It aims to promote the development of domestic commodity production, create a transparent, fair environment and develop financial instruments in support of the Government to stabilise prices of commodities in Vietnam. Besides, VNX offers an effective investment channel for investors with derivatives many investors expect. VNX applies spot and futures delivery in a bid to create more investment options and price insurance for commodities.

 

Master Nguyen Duy Phuong, General Director of VNX, said: Three commodities are being traded on VNX, namely coffee, rubber and steel. VNX opens from Monday to Friday with 23 hours a day and closes on from 6.00 a.m. to 8.00 a.m. It allows spot and futures buy/sale of commodities. VNX operates with two trading mechanisms, namely negotiation and tendering. Continuous order-matching is based on the principle of price and time precedence.

 

Frederick Wee, a financial expert at Ong First Tradition in Singapore, said: Managing trading risk will always play a very important part in a trader's success. Risks come from speculation, geo-politics, Act of God risk, and fraud.

 

“Just like bond or stock markets, the commodity market is populated by those who speculate in commodities to benefit from arbitrages. This is speculative risk investors should pay attention to,” he said.

 

The world's resources are distributed in different continents and controlled by governments, multinational corporations and other entities, he said. For example, a production stoppage in the world's largest bronze mine by industrial strikes will push up prices in future contracts. Wars or embargoes on countries supplying the commodity will cause prices to go up. Investors also should keep their mind on these risks.

 

“Besides, commodities may become a risk-bearing investment channel because it can be affected by unpredictable happenings like natural disasters. If disasters destroyed much of coffee areas, remaining coffee must meet higher demand. Therefore, prices will rise and investors buying coffee futures contracts will earn substantial profits while investors selling coffee futures contracts will suffer dramatic loss,” Mr Frederick Wee analysed.

 

Specially, investors must be wary of fraud. Although governing agencies will protect investors, they will still be victimised. Investors should carefully consider before they invest in commodity companies.

 

Mr Frederick Wee also recommends some common mistakes investors usually commit when they invest in futures commodities. Major mistakes include having no trading plan, inadequate trading assets, improper money management and unrealistic expectations. As this is commodity trading, it must follow market rules.

 

In addition, some other common mistakes investors should avoid are: Over-expecting at short-term investments; not using protective financial instruments; losing patience and not using investment principles; investing against general trends, or waiting for the peak or bottoming out; maintaining losing positions in a long term; carrying out so many transactions; etc. These easily lead to failure.

 

Specially, disclaiming responsibility for their deeds and lacking overview on market prospects, both technical and fundamental, are easy failure-causing mistakes in community trading. Mr Frederick Wee said investors should follow principles and understand the market as well as exchange with other investors and take advantage of available information technology for their business and investments.