The prices of commodities have been, and always will be, a hot topic. Commodity investments help investors diversify their personal portfolio risk and capture additional profit through other markets. But there's a catch. Access to these opportunities is not easy for small individual investors. The problem? Each commodity contract usually has its own investment requirements, such as initial margin requirements. Furthermore, in most cases, trading futures contracts involves more risks than investing in either stocks or bonds. (These funds make investing in gold, oil or grain an easier prospect. To learn more, see Commodity Funds 101.)

TUTORIAL: The Ultimate Forex Guide

And that's not all. There are additional maintenance margin requirements that have to be upheld, along with an understanding of the end-of-day profit and loss calculations. Although usually simple, these calculations can sometimes understate or overstate a market position, creating confusion for traders. So, with the large capital requirement and other complexities of commodities trading, how can an investor capture profitable opportunities in commodities?

The answer is simple – invest through the foreign exchange market. Like other financial markets, the currency or forex market shares directional relationships or correlations with other investment assets. Sometimes the relationships are directly correlated (they move together), other times they are inversely correlated (when one asset rises, the other falls). These relationships can help a retail investor gain access to other markets or help in analyzing global market trends. Now, let's look at three commodities that share trends with major currencies in the FX market and what makes them special.

Gold and South Africa
Gold has always been a safe haven asset. It helps in times of consumer price inflation and is seen as a physical commodity that stores wealth. The yellow metal also gains popularity in times of market turmoil and confusion. When the market turns lower and fear is rampant in the market, traders and investors seek out gold for its sustained value. A majority of the world's gold originates from the South African continent. As a country, South Africa ranks among the top-five gold producers with the likes of China, Australia, the U.S. and Russia. So, it's no surprise that the South African rand maintains a relatively tight, positively-correlated relationship with gold. This is especially true when price momentum builds and a price trend is strong in gold.

South African Rand and Gold
Figure 1: Relationship between gold and South African rand
Source: MetaTrader 4

From April of 2009 to June of 2010, the relationship remained strong, as gold prices soared to record levels and the South African rand appreciated against the U.S. dollar. Rising from about $863 an ounce, gold future prices traded to as high as $1,233.25 at the beginning of summer 2010 – an almost 43% surge. The move prompted a rally in the rand, with the currency breaking technical support at 9.83 per U.S. dollar. The South African rand appreciated by 24% during the same period. Now, although the gains aren't exactly the same, the takeaway here is that a trend in one asset will define the direction in the other asset. So, if there is a bullish trend in gold, you can bet that gains in the South African rand aren't too far behind. The relationship between gold and the U.S. dollar is typically a negative correlation. (Find out more about gold and reasons to invest in 8 Reasons To Own Gold.)

Silver and Mexico
Like South Africa, Mexico remains a top global metal producer, but its precious metal of choice is silver. In 2009, Mexico was the second-largest silver-producing country. For that year, Mexican silver mines produced almost 105 million ounces of silver – or approximately 15% of the global silver market. This makes the Mexican peso a necessity when dealing with Mexican silver miners, and creates a great market opportunity for retail traders in foreign exchange or any other investment asset class. (The quest for this shiny commodity has made millionaires of paupers, and vice versa. Check out Using Technical Analysis In The Gold Markets.)

Taking a similar look at both silver and Mexican peso charts, it is clear that there is a very strong relationship. At the start of the second quarter 2009, silver prices were trading just below $12 per troy ounce. This corresponded with a U.S. dollar/Mexican peso exchange rate of just below 14 pesos per U.S. dollar. With momentum of a commodities market recovery building, silver future prices skyrocketed higher throughout the rest of 2009 (ultimately peaking at $19.45 per troy ounce in December).

During the same period, the Mexican peso gained by an impressive 10.4%. The peso's rise at that time is impressive because other major currencies appreciated by about half that amount against the greenback. A retail investor looking to diversify into silver's bull market could have vicariously captured this opportunity through the Mexican peso.

Mexican peso and silver
Figure 2: Relationship between silver and Mexican peso
Source: MetaTrader 4

Copper Prices and Chile
Copper is unlike silver or gold. Instead of being a precious metal, copper and its corresponding ore is mainly used in the production of electrical and manufacturing products. With global industries still depend on copper as a base metal, there's always going to be a consistent demand. In many manufacturing companies, copper is still used as a main conductor for certain commercial and retail products. This need for copper comes as a huge boon to Chile's economy.

Chile is a major global producer, which pumped out almost 5.5 billion metric tons of copper in 2009 – far surpassing U.S. production at just 1.2 billion metric tons. The sheer size and global output of Chile's mines has helped the country to capture approximately one-third of the overall copper market. As a result, anyone who needs copper might ultimately need to make the purchase with Chilean pesos. (Read more about copper in our commodities tutorial. Check out Commodities: Copper.)

This correlation creates a strong positive relationship between the Chilean peso and copper. Between the months of February 2010 and October 2010, the price of copper futures rose by 32% to approximately $3.80 per pound. In the same period, FX investors saw the Chilean peso return 11% over the U.S. dollar.

chilean peso and us dollar
Figure 3: Relationship between copper and Chilean peso
Source: Bloomberg

How to Position Yourself for an Extraordinary Return
Now that we've covered the major relationships in the market, it's time for the application. Let's take a look at how to take advantage of these correlations in order to reap a return.

Evaluating the daily chart below, we can see a technical buying opportunity for copper in July 2010. The commodity price is testing support at $3 per pound and is signaling a reversal as the 20-day moving average (green line) is beginning to rise above the 50-day moving average (purple line). Upward copper prices usually mean an appreciating Chilean peso.

chilean peso and us dollar
Figure 4: Fifty-day (purple line) and 20-day (green line) moving averages of copper
Source: Bloomberg

The Bottom Line
For those individual or retail investors looking to gain exposure into hot commodity trends, the foreign exchange markets provide the answer. Intermarket relationships are a great way to obtain a lower trading cost basis and increase ease of accessibility when it comes to capitalizing on market opportunities. It's just another way to use forex markets to diversify a global investment portfolio. (Opening long or short positions to cash in on a trend is one of the simplest ways to trade forex. For related reading, refer to Trade Forex With A Directional Strategy.)

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  3. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  4. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  5. Investing News

    Should You Invest in Disney Stock Before Star Wars?

    The force is strong with Disney stock, as it continues to make gains going into the launch of EP7. But is this pricey stock a good buy at these levels?
  6. Investing News

    Silicon Valley Startups Fly into Space

    Space enthusiasts are in for an exciting time as Silicon Valley startups take on the lucrative but expensive final frontier.
  7. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  8. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  9. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  10. Entrepreneurship

    Identifying And Managing Business Risks

    There are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
  1. Is Chile a developed country?

    As of 2015, Chile is the only country in Latin America that is generally recognized as a developed country. In 2010, the ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  6. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center