Commodities Adam Maitin Colgate Finance Club – Spring 2011
What is a Commodity • Commodities are often substances that come out of the earth and maintain roughly a universal price. • Examples of commodities include iron ore, crude oil, coal, salt, sugar, coffee, beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, platinum.
How is Price Determined • Prices are universal and fluctuate daily based on global supply and demand. • The inventory of commodities plays a role in the pricing, with low inventories typically leading to more volatile future prices and increasing the risk of of a stockout (inventory exhaustion)
How to Trade Commodity Futures • Commodity futures trading involves buying and selling contracts for the future delivery of physical raw materials. • The futures market allows producers and consumers of each product to engage in risk management. • Although making the actual futures contract trade is similar to buying and selling shares of stock, the trade is different in that almost all futures are bought on margin. • As a result profits and losses are magnified.
Exchanges • Chicago Board of Trade (CBOT) • Chicago Mercantile Exchange (CME) • Dalian Commodity Exchange (DCE) • Euronext.liffe (LIFFE) • Kansas City Board of Trade (KCBT) • Kuala Lumpur Futures Exchange (KLSE) • London Metal Exchange (LME) • New York Mercantile Exchange (NYMEX) • National Commodity Exchange Limited (NCEL) • Multi Commodity Exchange (MCX) • International Indonesian Forex Change Market (IIFCM)
Brent Crude • Brent Crude is the biggest of the many classifications of crude oil. • The other well-known classifications are the OPEC Reference Basket, Dubai Crude and West Texas Intermediate (WTI) • Recently there has been a divergence as wide as $11 in the price between Brent and WTI.
Natural Gas • Nat. Gas is difficult to store and transport. • There are many types of natural gas. • The price varies greatly depending on weather, location and type of consumer. • Recently, we have seen the price stagnate because of low demand. • As a result, national supply as well as Canadian imports have decreased.
Gold • Will the price of gold stop rising? • Why is the price so high? • When investors are fearful of the markets, they put their money in gold. • It is viewed as a safe investment when markets are bearish and or volatile.