Have you ever wondered why the price of oil goes up and down so much? Or why the coffee you buy at the supermarket suddenly becomes more expensive? All of this has to do with something called the commodity cycle. And if you invest or are thinking about investing, understanding this cycle can make a huge difference.
In this article, I’ll explain in simple and clear terms how the commodity cycle works, how it impacts your investments, and what you can do to protect yourself or take advantage of the opportunities it brings.
What Are Commodities?
Before we talk about the cycle, we need to understand what commodities are. In short, they are basic products that can be stored and traded, such as oil, gold, coffee, soybeans, and even meat.
These products are essential for our daily lives and for the global economy. For example, oil is used to produce gasoline, and coffee is the drink many of us need to start the day.
What makes commodities special is that they are practically the same, no matter where they come from. Soybeans from Brazil are the same as soybeans here in the United States. That’s why their prices are determined by global supply and demand.
What Is the Commodity Cycle?
Now that you know what commodities are, let’s talk about the commodity cycle. This cycle is like a rollercoaster of prices that goes up and down over time.
Imagine you have a coffee plantation. If a lot of people want to buy coffee, but production is low, the price will go up. On the other hand, if there’s a lot of coffee on the market and few people buying it, the price will drop.
This movement of highs and lows doesn’t happen overnight. It can last for years and is influenced by various factors, such as weather, politics, technology, and even wars.
How Does the Cycle Work?
The commodity cycle has four main phases:
- Expansion: Demand for a commodity increases, but supply is still limited. This drives prices up.
- Peak: Prices reach their highest point, and producers start investing more to increase production.
- Contraction: Supply increases, but demand begins to decline. Prices fall.
- Trough: Prices hit their lowest point, and producers reduce production.
This cycle repeats over time, creating opportunities and challenges for investors.
Why Does the Commodity Cycle Affect Your Investments?
If you invest in stocks, funds, or even real estate, the commodity cycle can influence your results. Here are some practical examples:
Company Stocks: If you own shares in an oil company and the price of oil rises, the company’s profits may increase, and so could the value of your shares.
Inflation: When commodity prices rise, the products we consume become more expensive. This can lead to inflation, which affects the purchasing power of currency.
Interest Rates: To control inflation, central banks may raise interest rates. This impacts loans, financing, and investments in general.
In other words, the commodity cycle isn’t something distant. It’s directly linked to your wallet and your investments.
How to Take Advantage of the Commodity Cycle
Now that you understand how the cycle works, you might be wondering, “How can I use this to my advantage?” Here are some tips:
- Diversification: Invest in different types of assets, such as stocks, funds, and commodities. This way, you reduce the risk of losing money in a single area.
- Keep an Eye on Trends: Follow news about the global market, weather, and politics. This can help you predict changes in the cycle.
- Invest in Commodity ETFs: ETFs are funds that track the performance of a group of assets. They’re a simple way to invest in commodities without having to buy the physical product.
Practical Examples
Let’s see how the commodity cycle has affected some products in recent years:
Oil: In 2020, the price of oil dropped significantly due to the pandemic. But in 2022, with the war in Ukraine, prices rose again.
Coffee: In 2021, frosts in Brazil reduced coffee production, and prices rose. In 2023, with production recovering, prices fell.
Gold: During crises, many people invest in gold as a form of protection. That’s why its price tends to rise in times of uncertainty.
List of Common Commodities
Here are some examples of commodities and how they’re used:
- Oil: Fuel, plastics, chemicals.
- Gold: Jewelry, investments, technology.
- Coffee: Beverages, food.
- Soybeans: Animal feed, oil, biodiesel.
- Meat: Human consumption.
- Natural Gas: Energia, aquecimento, produção de fertilizantes.
- Silver: Joias, eletrônicos, fotografia, aplicações médicas.
- Wheat: Produção de pão, massas, alimentos processados.
- Cotton: Indústria têxtil, tecidos, papel, produtos médicos.
- Copper: Fiação elétrica, construção, eletrônicos, baterias.
What to Do Now?
Understanding the commodity cycle is like having a map to navigate the world of investments. It helps you make more informed decisions and take advantage of opportunities that arise with price changes.
If you’re just starting out, don’t worry about getting everything right the first time. The important thing is to learn, diversify, and keep an eye on trends. Over time, you’ll gain confidence and see how this knowledge can transform your investments.
So, are you ready to start exploring the world of commodities? Share your questions or experiences through the comments. Let’s learn together!
Questions and Answers
Is the commodity cycle predictable?
Not entirely. It’s influenced by many factors, such as weather and politics, which are hard to predict. But with study and attention, you can identify trends.
Can I lose money investing in commodities?
Yes, as with any investment, there are risks. That’s why it’s important to diversify and not put all your money into one area.
What’s the best phase of the cycle to invest in?
It depends on your strategy. Some investors prefer to buy during the trough, when prices are low, and sell at the peak. Others prefer to invest long-term, regardless of the cycle.
