Who Sets the Price of Commodities?

Who Sets the Price of Commodities?

Commodity trading has evolved to include the use of sophisticated financial products such as options, futures, swaps, derivatives and so on. Gold, crude oil, copper, silver, corn, natural gas, soybeans, and other commodities are widely traded around the world. There are six commodity exchanges in India, the most famous of which is the Multi Commodity Exchange (MCX). Online commodity trading takes place on various exchanges in India and is governed by the Securities and Exchange Board of India (SEBI).

 

Commodity market participants

Before attempting to comprehend how commodity prices are decided, it is necessary to first understand who engages in commodity trade, as it is these players and their activities that drive commodity prices up or down. Commodity market participants are often divided into two groups: speculators and hedgers. The first sort of commodities trader or hedger is typically composed of factories or industries that demand huge quantities of raw materials and thus have a pressing need to obtain these at stable rates.

 

How are commodity prices determined?

With our basic understanding of commodities markets and their players, we can now look at how commodity prices are set. Commodity prices, like stock prices, fluctuate continuously due to a variety of variables.

 

  • Factors of Macroeconomic and Geopolitical Importance - Commodities are typically subject to geopolitical issues as well as the overall economic picture. For example, political or economic instability in one or more OPEC countries may affect crude oil prices because these countries produce the majority of the world's oil.

 

  • Supply and Demand - Commodity prices, like all other prices, are controlled by the demand and supply concept. Traders put buy and sell orders on commodity exchanges. When buyers outnumber sellers for a given commodity, prices rise; when sellers outweigh buyers, prices fall. Commodity demand and supply are impacted by a variety of factors.

 

  • Trading by Speculators - As previously stated, speculators are market participants who enter commodities markets with the primary goal of benefitting from price fluctuations without physically possessing the underlying product. Sustained, coordinated market action by speculators can also have an impact on prices. For example, if a significant number of people believe that the future prognosis for a specific commodity is particularly positive, they may begin purchasing that commodity in big quantities, boosting the price of the underlying commodity. Commodity speculators can be individuals or institutional investors who engage in high-end algorithmic trading to profit from price movements in commodities.

 

Wrapping Up

Commodities trading can be an excellent strategy to diversify one's portfolio if one understands the dangers and has a thorough understanding of what moves the market and how. At the same time, commodity prices are significantly more sensitive and responsive to geopolitics, weather, macroeconomic factors, and so on than stocks. Today, many virtual platforms for commodity trading in India allow simple and transparent access to the commodity markets. Before investing one's hard-earned money, it is critical to conduct extensive study on every area of the market. Commodities trading, while promising potentially great returns, also carries increased risks.

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