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Global Commodity Prices Explained – the Market and its Traders

Posted March 28, 2013 by inna to Finance 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Global commodities are defined as “products” traded in markets. These may be anything from pork bellies to weapons. They are traded, in markets, as either spot trades; future trades; or forward trades. The commodities markets differ from stock markets and FX or monetary markets (FX means foreign exchange) in that the substance being bought and sold is essentially real: however, the existence of futures and forward trading, and also of hedging, within the commodity markets means the same dangers are inherent here as with any investment.

The history of the commodity markets is based in the agrarian roots of ancient civilisations. It is thought, for example, that the Sumerian market in which animals were traded in theory, by using clay tokens baked to look like a sheep or a pig (which were then exchanged for the actual pigs or sheep at a later date), was an early form of commodities market. In more recent times, railroad futures in America had a similar function.

The basic function of global commodity prices is to tell bidders on the floor of commodity markets what they can expect to pay at a given time for the commodities they are buying. As with all speculation, the trick is to buy low and sell high: and the skilful manipulation of data about companies from whom the commodities are coming may form a key part of consultation on exactly what to buy and when to buy it.

It is generally assumed that the commodities market is there for people who wish to make money in this way, by speculating on the forward price of a commodity rather than because they actually wish to own (for example) a million tonnes of steel. Investment in the commodities market is what has happened, then, when a person is spoken of as having made all of his or her money in steel, or jute, or any other form of direct physical commodity that may be traded around the world.

Clearly the whole edifice of the commodity market – except in cases where small amounts of immediate or spot investment are made, for example at an actual livestock market – is based on trust. The commodities in question are not in the room nor anywhere near it: often they are in ships or in warehouses on the other side of the globe. As such, the market runs to a system of agreed standards: samples of commodities are sent to be inspected for standardising, and it is against the standards decreed after sample inspection that these commodities stand or fall. The prices of the commodities traded on the markets are set according to these standards: some conceptual danger therefore exists that superior samples may raise the price of inferior products, and a luckless investor be left holding a worthless baby.

The most common forms of investment or market play in commodities are through futures contracts or forward contracts, both of which rely on the idea that the actual exchange of the commodities will take place at an agreed future date, though the price is set at the time of buying. This is a form of speculation on the part of the buyer that the commodity in question will rise in value during the elapsed time, thereby making his or her purchase profitable when sold on again.


About inna: Alfred Smith is a market analyst. Click here to see where he gets his figures.

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