Buy Gold, Sell Coffee

“Commodities” are raw materials that have different uses. They can be anything from orange juice and maize to oil and copper to precious metals like gold and silver. In the same way people can buy shares and bonds in companies to make money, they can also buy commodities to sell on to make a profit. This is called ‘commodity trading.’

The prices of commodities, like all prices, are set by how much demand there is for them and how much is supplied. At the moment, demand for commodities is rising because investing in them has become more fashionable than investing in company shares.

Gold is a special commodity. It becomes very important when there are uncertainties such as war, or a falling stock market, because investors buy gold as a “safe haven” for the future.

That’s why central banks around the world hold about a third of all the gold ever mined! People invest in precious metals because they think they will become more valuable.

For instance, silver coins or gold bars can be bought today and sold in the future when their prices have (hopefully) risen. Unlike gold, which is quite rare, some commodities are over-supplied. Coffee, for example, is becoming over-produced because poorer countries like Uganda are getting more efficient at producing it and new countries like Vietnam are also supplying it.

It would take a big increase in the demand for coffee to drink all of this extra supply; but until that happens, coffee will probably become cheaper. Trading commodities can really be exciting - and can make huge profits. But you’ve really got to know what you’re doing!

By Razia Khan
Razia is the Chief Economist on the Africa Desk at Standard Chartered Bank

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