Where Are Commodities Traded?
Commodities are traded on various exchanges that specialize in specific types of goods. Some notable exchanges include:
LIFFE (London International Financial Futures and Options Exchange): The largest trading floor for commodities in Europe, focusing on soft commodities such as cocoa, wheat, coffee, sugar, and corn.
NYMEX (New York Mercantile Exchange): The world’s largest physical commodities futures exchange, specializing in energy and metals, including crude oil, natural gas, gold, silver, and copper.
London Metal Exchange: A leading market for non-ferrous metals, including aluminum, copper, nickel, and zinc.
ICE Futures US: A major global exchange for soft commodities like sugar, cotton, cocoa, and orange juice.
CBOT (Chicago Board of Trade): The oldest futures and options exchange, specializing in grains such as corn, soybeans, and wheat.
Commodity futures are traded in contracts, with each market having a standard contract size set by the exchange. For example, the contract size for gold futures is 100 troy ounces. If gold is priced at $1,100 per troy ounce, purchasing one contract would cost $110,000. Given that small investors may not have such large sums, many exchanges offer leveraged trading options or "mini" contracts, which are smaller than standard contracts, typically between 10% and 50% of the standard size. It's crucial to verify the specific contract size before trading, as these can vary widely by commodity.
What Drives Commodity Prices?
The primary driver of commodity prices is the balance between supply and demand. For instance, a good cotton harvest can lead to an oversupply, resulting in lower prices, while increased demand from manufacturers can raise prices if supply cannot keep pace.
Several factors also influence commodity prices:
Weather: Agricultural commodities are especially susceptible to weather conditions. A poor harvest can reduce supply, driving prices up.
Economic and Political Events: Instability, such as conflicts or political unrest, can impact supply chains. For example, tensions in the Middle East can cause oil prices to fluctuate due to supply uncertainties.
US Dollar Strength: Since commodities are typically priced in US dollars, their prices often move inversely to the dollar's value. If the dollar weakens, it takes more dollars to purchase the same amount of commodities, causing prices to rise. Conversely, a stronger dollar generally makes commodities cheaper.
