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What is a Commodity?

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  • Written By: Brendan McGuigan
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 April 2016
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In the broadest sense, a commodity is anything that has value, from watches to time to oranges. In a more specific market sense, however, it is an item which is roughly the same market value across the board, with no difference based on quality. Watches, for examples, are not market commodities, because a well-crafted, artisan watch might cost a hundred times as much as a cheap, lower-quality watch. Copper, on the other hand, is always roughly the same price at a given time, because copper is always copper.

Because of this feature, it acts as an excellent investment vehicle, and so fluctuates more or less entirely based on the market itself. A company that mines copper, for example, may gain or lose value based on any number of factors, including the hiring of a new CEO, new legislation in the company’s home country, or simply a perceived weakness in the country. Copper itself, however, has a value determined only by the global supply, the global demand, and the amount of investment being shuffled into copper.

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The mainstream commodity market can be split into a number of different markets: precious metals, industrial metals, livestock, agricultural products, energy, and some other items that don’t easily fall into a classification. Precious metals include gold, silver, platinum, and palladium. Industrial metals include aluminum, aluminum alloy, nickel, lead, zinc, tin, recycled steel, and copper. Livestock includes live cattle, feeder cattle, pork bellies, and lean hogs. Agricultural products include soybeans, soybean oil, soybean meal, wheat, cotton number two, sugar numbers eleven and fourteen, wheat, corn, oats, rice, cocoa, and coffee. Energy includes ethanol, heating oil, propane, natural gas, WTI crude oil, Brent crude oil, Gulf Coast gasoline, RBOB gasoline, and uranium. The commodity market also includes rubber, wool, polypropylene, polyethylene, and palm oil.

Many other things could be considered a commodity as well, but they are not traded on a global spot market, and so aren’t usually lumped in with the above items. These include things like rare metals, such as silicon, cobalt, lithium, titanium, selenium, or magnesium, minerals such as bromine or cement, or agricultural products like potatoes, eggs, or flowers.

Each commodity is usually traded on a different market, and in a different currency. Each one also has a minimum quantity that must be purchased on the spot market. For example, the precious metals are traded in units of one Troy ounce, with gold and silver traded on the CBOT exchange, and platinum and palladium traded on the NYMEX, all in US Dollars (USD). Almost all of the industrial metals are traded on the London Metal Exchange, all in USD, and all by the metric ton. Most gasoline and oil futures are traded in minimum quantities of 42,000 US gallons. Livestock, on the other hand, is all traded on the Chicago Mercantile Exchange, in 40,000 pound increments.

Generally, when the stock market becomes volatile, people tend to move their investments into the commodity markets, because they are less volatile. These markets are viewed as being one of the most efficient sorts of markets, responding rapidly to any shift in supply and demand, reaching an equilibrium point rather easily and without too much drastic fluctuation.

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