Commodities Overview

History of Commodity Trading

Dealing commodities is as old as history itself, and far outdates trading stocks and bonds. Ancient civilizations traded a wide array of commodities, from seashells to precious metals and spices. Commodity trading was an essential business that facilitated the growth of cities and the enrichment of culture.

The might of empires can be viewed as somewhat proportionate to their ability to create and manage complex trading systems and facilitate commodity exchanges, serving as the wheels of commerce, economic development and tax revenues for a kingdom's treasuries.

Although most of the principals—in for example, Ancient Athens—were people who created or used the physical goods in some way, there were doubtless speculators eager to bet a drachma or two on the upcoming wheat harvest without any intention of ever baking some bread.

Characteristics of Commodity Types

Basic economic principles of supply and demand typically drive commodities markets: lower supply drives up demand, which equals higher prices, and vice versa. Significant disruptions in supply, such as a widespread epidemic among cattle, might lead to a spike in the generally stable and predictable demand for livestock.

On the demand side, global economic development and technological advances often have a less dramatic, but important effect on prices.

For instance, the emergence of China and India as significant manufacturing players has contributed to the declining availability of industrial metals, such as steel, for the rest of the world.

Volatile or bearish stock markets typically find scared investors scrambling to transfer money to precious metals such as gold, which has historically been viewed as a reliable, dependable metal with conveyable value whose value increases during times of macroeconomic volatility.

Types of Commodities

Today, commodities are typically placed under two categories: Hard and Soft commodities.

Hard commodities are natural resources, that are either mined or extracted from the earth. These can include various metals, oil and natural gas. The production and supply of these assets can be predicted fairly easily due to the massive extraction efforts and steady potential supply that is readily available.

Soft commodities are human-grown material that are used as raw material for other products. This can include agricultural products, wood, livestock, and meat. There are far more variables involved with these commodities, therefore creating a less predictable market than hard commodities.

Metals

Gold, silver, platinum, nickel, aluminum, and copper

Energy

Crude oil, coal, heating oil, natural gas, and gasoline

Livestock and Meat

Lean hogs, pork bellies, live cattle, and feeder cattle

Agriculture

Wood, rubber, corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar

Peter Pham