Introduction to commodities

by Admin
Updated: July 12, 2018

A short and simple introduction to commodities and their use as macroeconomic indicators

Commodities are essentially raw materials - things that can be grown & harvested or dug out of the ground and eventually turned into products. Their prices are reflective of large scale supply & demand, i.e. they are macroeconomic indicators. Although it is possible to make trades that are based directly on the prices of commodities, an awareness of the ongoing price fluctuations can be most valuable for understanding and predicting downstream implications.

The TradingView widget below shows prices for some of the more popularly traded commodities. Click anywhere on the appropriate row to change the mini-chart. If you click on the actual symbol, it will also take you to the Advanced chart in a new browser tab:

Should I trade in commodities?

Properly trading in commodities is done at high volume in its cash market. For the most part, commodities are physically delivered & used within a short time of being produced.

For example, when you go to your local farmers market to buy tomatoes, you want fresh ones and you must use them before they go bad.

And, if your business makes tomato products and it keeps growing, you’ll be buying ever larger quantities from ever larger markets and perhaps eventually reach this level. Otherwise, you won’t be trading commodities directly.

What most people think of as commodities trading is actually betting on the future prices of commodities through derivatives such as futures.

Commodities as indicators

The prices of commodities directly affect the industries that use them and, in turn, the industries using the products that contain them right the way down to the end consumer. Somewhere in this chain are links that significantly affect your income & investments.

The current price of any commodity is its spot price - the price being paid on-the-spot for that commodity in the cash (or spot) market.

A commodity’s futures price will normally be reasonably reflective of its spot price but, because it is forward-looking, is arguably a better choice for making predictions.

A more thorough analysis will look at both and explain the difference in terms of fundamentals.

More info

“Introduction to Commodities” at ohio.edu.

“Commodities trading: An overview” at investopedia.com.

“Commodities” at bloomberg.com.

“Commodity Prices” at markets.businessinsider.com.

Internal links

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