What drives price in the commodity markets?

Julie Brownlee, Fsp Invest, 09 May. 2014

Tags: commodity markets, commodity prices, commodity prices, commodities, price moves, how to play the commodity market

Supply and demand are very much the driving forces behind the commodity markets. And this supply and demand has a bearing on the prices of commodities. So how do prices in the commodity markets respond to shocks? And how can you exploit price movements in the commodity markets? Let’s take a closer look…

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Commodity markets are efficient

Commodity markets are efficient markets. It’s this efficiency that means price movements in commodities all boils down to supply and demand.

Unless there is a shock to either the supply side or the demand side, large price movements don’t generally happen. Supply and demand keeps the prices of commodity in a natural balance.

If you look at the charts of the prices of many commodities, you’ll see relatively boring movements for long periods of time. These trends can go on for years.

When shocks hit commodities, it can cause a sharp price rise. For example, there’s a disruption to the supply of a commodity. But this tends to be a temporary thing. The price soon falls back.

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How to exploit price moves in the commodity markets

To make the most out of moves in the commodity markets, you need to buy into a sharply rising trend. Then you need to sell quickly before the inevitable price correction.

The commodity price will crash when new supply catches up with speculators.

You need to be wary of speculative spikes. These occur when a commodity breaks out of its established trading range and spikes upwards. Only buy in at the early stages of a spike. Not after a large price movement. Especially if this is three times or four times the old trading range price.

So, there you have it, what drives price in the commodity markets.

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