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An introduction to Commodity Prices

By Edited May 15, 2016 0 0

Commodity Prices

 

Learning about commodity prices may seem like something reserved for city traders, but it is actually a very interesting subject. Lots of different commodities are traded around the world, the most famous probably being gold. However pretty much every other metal is traded as well- silver, copper, steel and platinum to name just a  few. Furthermore commodities do not have to be metals- for example; oil, corn and orange juice are traded around the world at market prices.

The two basic factors that affect the price of a commodity are supply and demand. If a commodity is high in demand and low in supply it will tend to have a very high price (e.g. gold) Equally if a commodity is in high supply and low demand then it will tend to have a very low selling price. There are plenty of examples, both past and present that illustrate how the demand and supply principal works. For example there is a story about Napoleon, who had two particularly expensive sets of cutlery- one made of gold and one made of aluminium. However, of the two, aluminium was considered the more expensive as the electrolysis process used to extract it from its ore had not been discovered, and hence it was very low in supply.

A more recent example is the rise in lithium prices over the last decade, largely due to its use in rechargeable batteries to power electrical goods. When electric cars and rechargeable batteries were in lesser demand, so was lithium and the price was therefore lower. However with the massive demand increase for rechargeable batteries, in which lithium is used, the demand for the metal has increased, forcing lithium prices to increase very considerably.  Now that the price has increased, greater numbers of companies are now focussing on lithium production to make their money, and in doing so there are increasing the supply.

Another factor affecting commodity prices is the cost of producing or extracting the commodity in question. For example, world corn prices are not only affected by supply and demand, but are also affected by oil prices, as a rise in oil prices will increase the cost to farmers of producing their grain, and will increase the costs to shipment companies of transporting grain around the globe. The increased costs of production then lead to increased global corn prices, as corn producers will not sell their produce at a loss. Oil is a particularly good example, as it affects the prices of a lot of other commodities, in fact oil is one of the main reasons that many commodity prices appear to move together.

Commodity trading is now a massive business, with millions of people working directly in the industry but perhaps more shocking is how greatly we as consumers are affected- our fuel prices, food prices and goods prices are all affected by the world of commodity markets. For example if silver spot prices increase, you may find that jewellery in your local shop may go up in price.

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