Commodities are the raw materials of our world, the natural resources we use to build the things we need and use. Throughout human history, man has exploited our world’s natural resources to improve the quality of human life. Futures traders trade principally in commodities (and in currencies, though that’s not the topic of today’s post). Futures markets allow commercial users to mitigate the risk of fluctuating commodity prices and provide a means for futures traders and investors to profit from those price risks. If you’re going to trade in commodities, you should know a little about them both practically and historically.Our global economy is built on three basic types of commodities, the principal players in the futures market: (more…)

Commodities, like the market, are cyclical in nature, rising and falling according to the current business cycle. Like other market vehicles, commodities are influenced by economic forces. However, unlike other market vehicles, futures traders can trade commodities profitably even in bad times.

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Even when the world is at its most turbulent, commodities provide a safe haven for futures traders. Commodities are inelastic goods. In economics, elasticity quantifies how price changes affect supply and demand.

Elastic goods exhibit a high correlation between price and demand. When the price of the good goes up, demand decreases. Elastic goods are generally less-essential goods, meaning that you can live without them or at least use less of them or substitute a less expensive option. The dance between price and demand can be complex. For example, when the cost of milk rises, people buy less milk and fewer milk products. Some people will stop buying milk altogether until the price comes back down. Families with young children who still need milk will serve their children less milk or milk with a lower fat content and, therefore, cheaper price tag. They may substitute enriched soy milk or calcium supplements and calcium-fortified breads and cereals to ensure their children get a full dose of bone-building calcium. Sales on cheese, ice cream and other dairy products will plummet in concert with how necessary they are perceived to be. Ice cream is considered a luxury so when ice cream prices rise, sales fall.

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To succeed as a futures trader, you need to think creatively about commodities. The story of Sam Brannan, California’s first millionaire, serves as an excellent example:

At the beginning of the 1848 Gold Rush, Sam Brannan, who owned a general store in Sutter’s Fort, discovered that John Sutter and James Marshall had discovered gold. Understandably, the discoverers wanted to keep the strike a secret. Brannan agreed, then quietly scoured northern California buying up every shovel, pick and pan he could find until he had cornered the market. He then went around town yelling, “We found gold!” and the Gold Rush was on. Hundreds of people flocked to northern California, all needing shovels, picks and pans to search for gold. And there was Sam, the only source for hundreds of miles around! Sam Brannan never lifted a shovel, never swung a pick, never shifted a pan in the search for gold, but he became the first millionaire of the Gold Rush — selling shovels.

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Futures trading is a risky business. The untrained, unwary, unknowledgeable, undisciplined or sometimes plain unlucky can lose a fortune — and in an agonizingly short time. In fact, the SEC requires futures trading websites to post a disclaimer concerning the potential risks involved in trading commodity futures. You’ll find a full disclosure statement on my Futures Trading Secrets website.

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In a Windy City a long time ago . . .

Though some suspect the ancient Phoenicians and Greeks may have dabbled in futures trading, the modern futures market was born in Chicago with the establishment of the Chicago Board of Trade in 1848. Know as the hog butcher to the world, Chicago was also the commercial hub connecting Midwestern plains farmers with East Coast food merchants. Telegraph lines, railroads and shipping all passed through Chicago. It was to Chicago that Midwestern farmers came in the 1840s to sell the wheat that fed the world.

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