Everyday essentials in the lives of Brits encompass commodities, which include the food consumed and the fuel that powers our vehicles. Commodities denote basic goods traded in significant quantities and are interchangeable with similar goods. They are either immediately available for delivery in spot trading or are scheduled for future delivery when traded as futures.
Metal commodities (such as aluminium, copper, gold, etc.) and “soft” items (like cocoa, coffee, sugar, oil, etc.) are actively traded in commodity markets. In this article, we’ll be learning exactly what commodities trading is, and the wide range of factors that can impact the process.
The History of Commodities Trading
Commodities trading dates back to ancient times, predating the trading of stocks, bonds, and even money, as per many anthropological perspectives. Many historical empires flourished due to their adeptness in establishing sophisticated trading systems to facilitate commodity exchange. Understanding the history of commodities trading is integral to comprehending the history of colonialism.
Before the advent of rail and industrial shipping in the 19th century, the high costs associated with transporting goods across continents and oceans meant only high-value items like spices, coffee, cocoa, gold, and silver were worth trading internationally.
Two pivotal moments led to the present global trade dynamics: advancements in transport technologies in the 19th century and the development of massive harbour facilities post-World War II and the Suez Canal crisis of the late 1950s. The cost of shipping bulk goods decreased significantly during this time, enabling the global trade of even low-value materials and waste.
Commodities trading has evolved to incorporate the latest technological innovations, facilitating increased global trade volume through exchanges, both physical locations and legal entities enforcing standardised commodity contracts.
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How Does the Commodities Market Work?
Commodity markets are primarily driven by the principles of supply and demand. Changes in supply directly impact demand, with low supply translating to higher prices. Any disruptions in commodity supply, such as disease outbreaks or adverse weather conditions, can lead to price spikes.
Global economic developments and technological advancements significantly influence commodity markets. The emergence of manufacturing powerhouses like China and India has spurred demand for industrial metals, altering global supply dynamics. The types of commodities broadly fall into four categories: metals, energy, livestock and meat, and agricultural products.
- Metals: Gold, silver, platinum, and copper are sought after, especially during market volatility, owing to their perceived stability. Rare earth elements have gained prominence due to their importance in various industries.
- Energy: Crude oil, natural gas, and gasoline are vital energy commodities whose prices are impacted by economic shifts, technological advancements, and geopolitical events.
- Livestock and Meat: Livestock, predominantly raised for meat, plays a significant role in the agricultural commodities market, with trade agreements and consumer preferences shaping global trade dynamics.
- Agricultural Products: Corn, soybeans, wheat, and other agricultural commodities are influenced by factors like climate change, consumer preferences, globalisation, and technological advancements.
What Factors Impact Commodity Prices?
Commodity investment returns are influenced by huge range of factors. We’ll outline a few of the main ones below (as there are too many to fit them all on one page!):
Changes in Costs
Basic gains or losses in commodities hinge on differences in carry costs, storage expenses, insurance premiums, and financing charges. These elements collectively contribute to the overall cost structure and affect commodity prices.
Currency Fluctuations
As most commodities are priced in U.S. dollars, shifts in the dollar’s value have a substantial impact on commodity prices. A weaker dollar can make commodities more affordable in other currencies, potentially boosting demand, while a stronger dollar may have the opposite effect.
Geopolitical and Economic Stability
Political events, economic policies, and instability in key regions can significantly influence commodity prices. Wars, political unrest, or economic sanctions in regions where a commodity is produced can disrupt supply chains, leading to price fluctuations.
Global Economic Trends
The overall health of the global economy plays a pivotal role in shaping the demand for individual commodities. Economic growth typically spurs increased demand for commodities, while economic downturns may lead to a decrease in demand.
