Commodities trading encompasses many a strange item — at one point you could invest in bacon. Obscure investing may seem strange and these markets are often thin, but there are plenty of valid reasons to do so. These markets are created for a reason, often becoming quite important to certain niche groups of investors. These odd commodities can include weather contracts, currencies, Australian greasy wool, black tiger shrimp, grape seeds, workload allocation cubes and even wood pellets.
The Shocking Nature of Trading Electricity
The electric commodity is truly bizarre because unlike traditional commodities it needs to be stored in a special way and distributed immediately, which causes a unique effect on supply and demand. Demand can suddenly spike and needs to be met instantaneously. A market such as this one isn’t open to everyone because of its real-time balancing act, and it should only be traded by professionals with a strong set of knowledge and experience. The innate complexities of hedging electricity make it particularly difficult, causing there to be a low trade volume at times. There are 10 electricity contracts available on the New York Mercantile Exchange, and each contract represents various geographic regions across the country. These different regions are affected by seasonal weather and time of year. For example, when it’s darker in the winter, electricity usage will increase.
Become Best Friends with a Meteorologist
Weather markets came out as an addition to the grain markets around 1997, and at some point in the ‘90s, weather began to be indexed into monthly and seasonal averages. This was the early development of weather contracts as they began to quantify weather and its impact on the economy. These commodities offer a similar benefit as insurance, but for much smaller events like unseasonably warm winter or cooler-than-normal summer. For example, if a region incurred a severe drought, those who invested in the corresponding weather commodities for a lower-than-average rainfall would be able to soften the financial impact of a dry summer.
Let Your Money Earn Money by Investing in Money
Investing in the currency of another country can be a wise way to hedge against inflation and diversify your portfolio. While some currencies, such as the U.S. dollar, are traded at a high volume, others such as the Polish złoty are not. In certain countries, their currency price may be closely tied to the price of another commodity. For example, the price of a Chilean peso might be tied to the price of copper, and the Canadian dollar may be tied to oil and gold. Not all currencies are worth trading, and some like the Nigerian currency – the naira – cannot be traded in the United States. Currency contracts are commonly traded by companies that conduct business in multiple countries. This is a way for them to reduce the impact of the varying values of different currencies.
While these contracts are not attractive to the average investor, they work well for hedgers and those in the industry. If you’re interested in investing in any non-traditional market, it’s highly recommended that you consult a professional.