CommoditiesAdam 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.

ExchangesChicago 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)

Indexes

Commodity Relationships

Oil and Natural Gas

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.

US Dollar Index