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Three Reasons Commodities are A Smart Investment

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  • 04 February 2010 3:42 PM GMT
By: Hillel Fuld
If one was looking to begin trading their money, they would have a whole group of markets from which to choose. There is the stock market, which is a popular choice, but might not be suitable for complete newbies. The Forex market, which is by far the largest market in the world, trades over 3 trillion dollars daily, but is accompanied by tremendous risks. Then there is the commodity market, which is risky, but not as risky as Forex, and offers some serious advantages over other markets.

The following are some of the advantages of the commodity market:

-Educated Investment: One of the problems with Forex trading is that no matter how long you have been trading, no matter how much of an expert you are on the market, you are bound to meet surprising developments in the market’s movements. Putting the technical vs fundamental analysis debate aside, no one can claim they know what tomorrow will bring in Forex. Now, I am not going to claim that the commodity market:is a sure bet, because there is risk in the commodity market:too, but you can definitely reach much more certain conclusions about the value of one commodity or another.
Without getting into the various methods of analyzing the market, since that is not the topic of the article, we will say that you can reach a very educated conclusion about a commodity by examining the value of stocks relating to it. So, if you were interesting in purchasing the beef commodity for example, you would take a look at the stock value of the major grain companies and that would give you an indication of what the future brings.

-Intra National Trading: Most commodity trading is done nationally. There is the expert factor as well, but the vast majority of the commodity market:numbers are focused on domestic usage. What this means for traders is that by studying the local market and possibly one or two other markets that regularly consume the commodity at hand, you can become somewhat of an expert on the commodity market in which you are trading. In contrast, the Forex market, by definition, works and requires you to be very familiar with at least two foreign markets. Most Forex traders regularly open positions in currencies completely foreign to them. So, for example, an American citizen might trader the EUR/JPY and that would require a deep understanding of both the Euro’s market as well as the Yen’s. Additionally, it is important to remember that a country’s currency is directly connected to the political, financial, and social developments of that country. This information is not always available to foreign citizens, and might actually be presented in the way that country’s government wanted you to see it, and will not have any correlation to the true state of affairs. This leaves you in the dark when it comes to your trading. In the commodity market:, on the other hand, you are generally concerned with your own country’s economy and political state, information that is generally much more available and easily accessible.

-Regulation: Some might see Forex’s lack of general regulation as an advantage, and truth be told, there are some positive sides to it. However, while there is close to no regulation on Forex brokers and the market as a whole, the commodities market is generally based and conducted through respected boards and exchanges, which leaves much less room for the “nonsense” we have grown so familiar with in the Forex market.

In conclusion, there are many advantages to Forex and endless reasons people decide to trade the currency market, however, a safe investment in generally not one of them. While the commodity market: has its share of risks as well, it is considered by many as a much safer investment than other global financial markets

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