What Influences Commodity Prices?

| January 30, 2015 | 0 Comments

What Really Influences Commodity Prices?

Due to an abundance of new readers at Commodity Trading Research, we’re taking a step back to cover the basics of commodities. If you missed the last article on commodity basics, you can find it here.

Let’s continue on that line of thought today with a discussion on what influences commodity prices.

The Biggest Factor Affecting Commodity Prices…

Without question, the biggest factor influencing commodity prices is supply and demand.

Of course, supply and demand is one of the most fundamental concepts of an entire market economy- not just commodities.

Here are the basics of this economic law…

Demand refers to how much of a product, commodity, or service is desired by consumers.

Supply refers to how much the market can offer of a particular commodity, product, or service.

The relationship between supply and demand plays a large role in the setting of prices for various commodities. If demand is larger than supply, prices rise. If supply outpaces demand, prices fall. If supply and demand are in balance, prices will stabilize.

Where do you find such information on supply and demand?

There are a plenty of private commodity research firms doing their own supply/demand analysis on various commodities. But most of the time, this information stays in house or is only available for a hefty fee.

As a result, I prefer using government reports…

For example, the US Department of Agriculture (USDA) supplies monthly World Agriculture Supply Demand Estimate (WASDE) reports.

These reports are available for anyone who’s interested in trading the grain and soft commodity markets.

What about other commodities?

If you’re interested in the energy markets, consider visiting the US Energy Information Administration (EIA). The government agency releases weekly, as well as longer-term, supply/demand information for crude oil, natural gas, and heating oil.

If you’re looking for supply/demand information on gold, look no further than the World Gold Council.

Other Factors Affecting Commodity Prices…

While it’s the largest factor, supply and demand isn’t the only thing affecting commodity prices.

Another large influence is currencies, namely the US Dollar.

As you may know, the US Dollar is the world’s reserve currency. That’s just a fancy way of saying the world uses the Greenback for most international economic transactions.

Due to this status, fluctuations in the US Dollar can lead to price adjustments in globally traded commodities. For example, a strong US Dollar tends to push the price of oil and precious metals lower.

When one asset rises while another falls, it’s called an inverse relationship.

It works the other way around too. When the Dollar is weak, hard assets like oil, gold, and silver tend to rise.

The Consumer Price Index is another influencing factor…

The Consumer Price Index (CPI) is a closely watched inflation indicator. The index constantly tracks a basket of goods and services and reveals whether that basket is increasing or decreasing in price.

If prices are increasing, it’s a sign the economy it is tracking is experiencing inflation.

Of course, a healthy amount of inflation is a necessity in a modern economy. The US Federal Reserve considers 2% annual inflation a healthy goal.

On the other hand, if CPI goes negative, it’s a sign of deflation. No matter how you slice it, deflation is a bad omen for any economy. When deflation occurs, the price of nearly everything falls, including commodities. 

Let’s not forget about the Gross Domestic Product…

Gross domestic product (GDP) is a measure of all the goods and services produced in a country. The higher the GDP, the greater the economic growth rate of the country in question.

Of course, the greater the growth, the more demand there is for goods, services… and commodities. That’s why you’ll see assets like oil and copper spike when a better than expected GDP report is issued.

But keep in mind…

In today’s global economy, it is important to keep track of the growth rates outside the US. While the US is still the world’s strongest economy, growth (or lack of it) in China plays an increasingly important role in global economic health.

These Are The Biggest, But Not Only Factors Affecting Commodity Prices

The factors above play a large role in how commodity prices are determined. However, there are other market forces, like investors sentiment (fear and greed), that can affect the price of assets as well.

We’ll continue our discussion on commodity trading basics in coming weeks. Stay tuned to Commodity Trading Research!

Until Next Time,

Justin Bennett
Commodity Trading Research

BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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