Commodities

    By
    Andrey Orlov
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    In trading, commodities are an asset class that describes raw materials and resources that are supplied in a standard and exchangeable way. Examples include:
    • Metals, such as iron ore, aluminium, silver or gold
    • Food items, such as wheat, rice, sugar, salt, coffee beans, and soybeans
    • Energy commodities, such as oil, coal, natural gas and electricity

    “Soft commodities” are grown, while “hard commodities” are the ones that are extracted through mining. Electricity has the particular characteristic that it is usually uneconomical to store.

    The market treats units of a commodity as equivalent (or nearly so), disregarding who produced them. For example, there is little difference between one barrel of crude oil and another barrel of crude oil, regardless of who the supplier or producer is. There can be slight differences in the quality, but it is essentially the same product.

    “From the taste of wheat it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.” (Karl Marx, Critique of Political Economy. 1859)

    An example for a good that is not a commodity are TV sets. They have many aspects of product differentiation, such as the brand, the perceived quality or the user interface. Thus, the demand for a specific TV set can be much larger than the demand for another.

    Commodities trading

    Commodities are usually priced in US dollars. If the US dollar is therefore not the denominated currency in your trading account, you need to be aware that exchange rate fluctuations will affect your trading results.

    Through CFDs, commodities can be traded on many brokers.

    Commodities & the forex market

    Some countries have economies that are strongly dependent on exporting commodities, such as Australia, Brazil or Canada. The values of the currencies of these countries are often influenced by changes in commodity prices. For example, Australia is a substantial producer of gold. If the price of gold increases, then more Australian dollars are needed to purchase that gold and so the value of the Australian dollar will increase.

    Read more about the influence of commodity prices on currencies:

    Forex fundamental analysis