THE COMMODITIES MARKET

Commodities Explained

Commodities are raw materials or basic products used to produce other goods or deliver services. They often take center stage during inflationary periods, serving as a hedge against inflation. Gold, in particular, has an important psychological value as a hedge against economic uncertainty.

But other commodities can also signal shifts in economic cycles. A bottom and rise in copper prices – widely regarded as a barometer of economic health – may signal bearish conditions for bonds and utilities, which are sensitive to interest rate changes.

Energy prices impact the whole economy, besides having a psychological effect on inflation. Rising oil prices, for instance, act as a “tax” on the economy as it tends to slow growth prospects. This often turns into lower interest rates and higher bond prices.

COMMODITIES AND THE US DOLLAR

Commodities, priced in US dollars, tend to have an inverse relationship with the USD. A strong USD often puts downward pressure on commodity prices, making them less attractive to investors.

Commodity groups

Similar to industry sectors in equity markets, the commodity market consists of several groups, each providing different economic signals.

Precious metals: Gold, Silver, Platinum, and Palladium. Copper, despite being used primarily for industrial purposes, is usually also lumped into this category. Precious metals are very popular among Forex traders due to their perceived monetary value.

Energy: Oil is the most prone to supply shocks, political tensions in Oil-producing countries or regions, policies from the Organization of the Petroleum Exporting Countries (OPEC), and volatile demand from emerging countries. These factors create significant risks for those trading in this market. Higher Oil prices tend to negatively impact equities, raising the prospects of higher inflation and slower growth.

Grains: Grain prices fluctuate on the so-called crop year, with planting and harvesting forming tradable price cycles. However, those cycles are influenced by unpredictable weather conditions. Key agricultural commodities include Corn, Soybeans, Wheat and Oats.

Soft commodities: This category includes coffee, orange juice, cocoa, sugar and cotton.

Some commodities, specifically the metals group, are considered tangible assets because they are non-perishable. Meanwhile, Silver and Gold have the advantage of consistent specifications across nations, unlike Texas and Brent crude Oil, which differ in composition.

GOLD SPOT - DAILY CHART

US DOLLAR INDEX - DAILY CHART

PALLADIUM - CHART

WTI OIL- DAILY CHART

The Bullish Percentage Index compares the four majors against the 21 most traded currencies (according to the BIS statistics). Among these currencies are the Korean Won, the Mexican Peso, the Turkish Lira, the Brazilian Real, etc. It shows the percentage of currency crosses on buy signals on Point and Figure charts. Point and Figure charts have the particularity of being objectively bullish or bearish, depending on the most recent double-top/bottom buy or sell signal. The Bullish Percentage Index is a breadth indicator used in stock indices, and its logic has been adopted by FXStreet.com to measure currency strength.

The index can be read as an oscillator, with readings between 0% and 100%. It is updated on a daily basis, on GMT close, and compared to the same data 5 days ago.