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In economics, Commodities are natural resources which are used as inputs to the production process. They are classified into 2 main categories, hard commodities and soft commodities. Hard commodities are those resources such as coal, crude oil or natural gas which have to be mined or extracted from the earth. Soft commodities on the other hand are agricultural products such as wheat, cotton or livestock. As the world’s economies revolve around the production of these natural resources to fuel the manufacture and satisfaction of our every day needs and wants, commodities are seen as an important asset class and this is also one of the major traded asset classes.show more
Generally prices of commodities are relatively stable as the markets demand for commodities tend to be constant. Yet, they are also known to be extremely volatile in nature due to the fundamental fact that any changes to the supply and demand equation require time to adjust. For example, let us assume that the daily consumption of crude oil the US is 2 million barrels. To cope with this demand, the crude oil producers will have a number of production facilities online ensuring that there is a constant supply of crude oil to the market.
Now, let us further assume that the automotive industry have developed a new kind of engine that uses hydrogen gas extracted from water as fuel in a cost effective manner. This means fossil fuels will no longer be required to power an engine. The announcement of such a breakthrough in automotive engineering will definitely result in less demand for crude oil leaving the market with a glut. Even if oil producers were to stop production overnight, excess crude oil stocks already produced will still require time to consume. In short, commodities prices are volatile as their production is relatively inelastic.
Due to the relative inelasticity with the supply of commodities, commodities price charts are normally shown with a longer time frame. Prices are displayed with the daily close spread over a time frame of a week to a few months. With shorter time frames such as an intraday price chart, the changes in prices are not as obvious hence making it difficult for you to pick out any significant price changes.
Changes in commodity prices also tend to be seasonal. As mentioned earlier, commodities also comprise agricultural produces like wheat and livestock. Before wheat can be harvested and sold onto the open market, it has to be planted, tended to and then harvest. Due to the weather, farming activities are normally confined to seasons such as spring and summer. It is these seasonal changes planting stages of agricultural crops that are shown as price fluctuations on the price chart.
It should be noted that the production of agricultural crops are based on estimates made by the industry experts. If the actual harvest or production of livestock is in line with the industry experts estimates, then prices will mostly like remain at a stable level. It is when production falls or exceeds the forecasted estimates that will cause prices to fall or spike. By monitoring the seasonal changes of prices on the commodity price chart, you will be able to spot an opportunity when it arises.