Commodities
Commodities are raw materials: energy such as oil and gas, metals such as gold and copper, and farm goods such as wheat and coffee. They are the inputs to everything else in the economy.
What moves the price
- Supply shocks: wars, sanctions, OPEC decisions, droughts, mine closures.
- Global growth, especially demand from China for industrial metals.
- The US dollar, since most commodities are priced in dollars.
- For gold: real interest rates and demand for safety.
How investors get exposure
Few people store barrels of oil. Most exposure comes through futures contracts, funds that hold futures, physical gold funds, or shares of producers. Futures-based funds must keep rolling their contracts forward, and that roll can cost or earn money on its own.
How it can hurt you
Commodities produce no income and can fall for years. Oil hit about $147 a barrel in July 2008 and below $35 by December. A strong dollar or a recession can push many commodities down at once.
The rhyme
The oil shock of 1973In October 1973 Arab oil producers imposed an embargo on the United States and other countries after the Yom Kippur War. Within months the price of oil roughly quadrupled, from about $3 to about $12 a barrel. Petrol queues and rationing followed, inflation surged, and the US slipped into recession. Energy shocks have rhymed ever since, in 1979, 1990, 2008 and 2022, each time testing whether central banks fight inflation or protect growth.
Terms you will hear
- Spot price
- The price for delivery now.
- Futures
- A contract to buy or sell at a set price on a future date.
- Contango
- Future prices above today's price. Rolling contracts then costs money.
- Backwardation
- Future prices below today's price, often a sign of tight supply.
- Brent / WTI
- The two main crude oil benchmarks, European and US.
Educational content only. Not a recommendation to buy or sell. Past performance does not indicate future results.