Factors Affecting the Price of Commodities
Not all commodities are created equal
Commodities is the term to define the raw materials, among which include corn, flour, oil, and metals. There are many contributing events that affect the prices of commodities, and not all commodities share the same events that affect their prices. These events range from inflation, news releases, global events, even climate changes, and they affect the supply and demand of the commodity causing the price fluctuation.
Supply and Demand
Commodities prices are driven by the forces of supply and demand. Traders undertake fundamental analysis and technical analysis to forecast market movements. They aim to buy when the price is low, which is usually determined by an abundance of supply and falling demand, and sell when they believe the supply outweighs the demand, which can result in a profit.
Huge price swings can occur when scarcity or abundance of a commodity suddenly looks likely. Taking oil as an example, if the supply of oil is expected to be strong, and market demand for it does not change much, then the oil price will fall. Often, tensions in the Middle East affect the stability of the oil supply, resulting in a shortage of supply in the market, and pushing oil prices higher due to expectations for demand surpassing supply in the short term.
Inflation
Inflation is the general rise in prices. Commodities are the raw materials for manufacturing processes or consumed by households and businesses. As a result, when prices rise in general, so should commodities.
Some commodities have shown more stability over others, such as gold, which also serves as a reserve asset for central banks to buffer against volatility. Gold has long been considered a safe-haven investment, a hedge against inflation, and won over many investors as a top inflation hedge.
Climate changes
For example, when there’s a big harvest of a certain crop, the price usually goes down. When there’s a drought, prices often rise because of fears that the supply will drop. Similarly, during cold weather, demand for natural gas for heating purposes rises. This causes prices to spike, too. But a warm spell during winter can depress prices.
Still, some commodities are relatively stable, such as gold, which also serves as a reserve asset for central banks.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.