What is commodity trading in South Africa?

Diversification is important for all traders, and for many, commodities are a key part of it. So, what is commodity trading, how does it work, and how can you start trading commodity CFDs (Contracts for Difference)?

Whether you’re new to trading or brushing up on the basics, this guide will tell you what you need to know about commodity trading in South Africa.

What is commodity trading?

Commodities are raw materials that fuel the global economy. They include both “soft” and “hard” commodities:

• Soft commodities are typically grown or produced, including rubber, sugar, soy, and wheat.
• Hard commodities are often mined and include metals like gold and silver.

That explains the commodities themselves, but what is commodity trading, and why does it matter?

A 30-minute candlestick chart for silver vs the US dollar on the Exness Terminal.

Definition and global role

Commodity trading is the act of buying or selling physical goods in order to profit from potential price moves. Traders aim to buy a commodity at lower prices and sell when prices rise.

When discussing what commodity trading is, we also need to address its importance in global trade and financial markets.

Commodities play a key role in global trade and industry. Agricultural commodities like wheat, sugar, and soybeans feed populations and livestock worldwide. These materials are essential, and their price can be affected by various economic and geopolitical events. Some commodities, especially gold and silver, are also used by investors as a hedge against inflation or economic downturns. When currencies and stocks struggle, precious metals like gold and silver tend to rally in price, as they are considered safe havens that can act as protection against inflation.

For this reason, investors, businesses, and governments may invest in commodities to diversify their portfolios and hedge against other investments.

Physical vs derivatives-based trading

Commodities trading can involve physical goods or contracts based on the prices of these goods. In the past, farmers and miners would sell physical goods or commodities, such as a harvest of wheat or a shipment of coal. This evolved into futures contracts, where they could lock in a price for a future harvest. If prices rose before the contract settled, the buyer could resell it at a profit.

Physical markets, also known as cash markets, still exist today. Companies use them when they need to buy the physical commodities themselves. For example, a jeweler may need to buy gold or silver, or a coffee chain may need to buy coffee beans. These trades involve negotiation on price and a set delivery date.

However, most traders don’t want to buy or store the raw materials and prefer to speculate on the price. This can be achieved with derivatives.

With derivative contracts, traders agree to buy a set amount of a commodity at a fixed price on a future date. They can then monitor the price with the aim of selling their contract at a profit if the price of the underlying commodity increases. These contracts are priced using the commodity’s spot price, which is the current market rate per unit. If the spot price goes up, then the contract appreciates in value and can be sold for a positive return.

So, what is commodity trading? It depends: If you’re a business that needs the raw materials, you’re trading in the physical market. If you’re trading to profit from potential price changes and don’t want to own the commodity itself, you should look into derivatives.

There are different types of derivative contracts, but all are based on locking in a price and then selling the contract at a future date. As with any speculative investment, all derivative contracts carry risks. 

• Futures: A contract to buy or sell a commodity at a set price on a future date. Traders must settle the contract on the expiry date or close the position before it expires.
• Options: Options give you the right, but not the obligation, to buy or sell a commodity at a set price before a certain date. They are more flexible than futures because they allow traders to let the contract expire without settling.
• Forwards: These contracts are similar to futures, but they are traded over the counter rather than on an exchange, which may carry more counterparty risk.

Types of commodities you can trade

The commodities market covers a wide range of raw materials. If you’re trading commodities in South Africa, these are the main categories to know:

Precious metals

Gold and silver are two of the most commonly traded commodities. They’re used in industries like electronics, medicine, and jewelry. But they’re also seen as stores of value—and this is why many governments will hold gold and silver bullion as reserves. For example, South Africa holds an estimated 125 metric tons of gold, while the USA, Germany, Italy, France, Russia, and China hold around 20,000 metric tons combined.

Mining output, supply and demand, and global economic events can influence the price of gold and silver on the global market.

Energy

Crude oil and natural gas account for a large share of global trade on the commodities market. These commodities power the manufacturing sector, so any change in energy prices will often affect other financial markets..

For example, an increase in oil and gas prices could increase operation costs for companies in manufacturing and transportation. This can lower profits, drive up inflation, and affect currency values, stocks, and stock indices.

Example of energy-based financial instruments on the Exness Terminal. The left panel shows live pricing for UKOIL, USOIL, and natural gas (XNGUSD), while the right panel displays a candlestick chart for XNGUSD.

Agricultural goods

Agricultural commodities form the “soft commodities” category mentioned above. They include products like sugar, coffee, wheat, soybeans, and cotton, and are some of the most volatile markets. Prices can shift quickly due to extreme weather, crop yields, trade policies, or other geopolitical issues.

Agricultural trading is popular among short-term traders looking to capitalize on these price swings. 

This guide on “What is commodity trading?” covers the basics of how commodity trading works in South Africa. To explore in more detail, visit our commodities overview page.