A commodity market is a market that trades in the primary economic sector, rather than manufactured products. Commodities are hard assets ranging from wheat to gold to oil. Since there are so many, they are grouped in three major categories: agriculture, energy and metals.
Agricultural commodities include: Things you drink, such as sugar, cocoa, coffee and orange juice. These are called the soft commodity markets.
The energy category includes crude oil, natural gas, gasoline and heating oil. Commodities trading is a major determinant in setting oil prices.
Metals include mined commodities, such as gold, copper, silver and platinum. The London Metal Exchange announced it would launch future contracts for metals used in batteries starting in 2019. The exchange expects there will be a large market for such metals as the demand grows for electric vehicles.
How Commodities Work:
Dealers trade commodities on an open exchange, meaning the prices change throughout the day. This can be difficult for the consumer, who must face price variations in everyday products such as gasoline, meat and grains. It especially impacts poorer people around the world, who pay more of their limited income on food and transportation.
The highest volume of trading occurs in oil, gold and agricultural products. Since no one wants to transport those heavy materials, they trade futures contracts instead. These are agreements to buy or sell at an agreed upon price on a specific date.
Commodities contracts are priced in U.S. dollars, meaning when the dollar’s value rises, it takes fewer dollars to buy the same amount of commodities. That makes commodity prices fall.
Financials are also traded in the futures markets. These include currencies, such as the 3-month euro dollar and the euro-FX. It also includes interest rates, such as the 10-year Treasury note. There are also futures on stock indices such as the S&P 500, but the Commodity Exchange Act doesn’t define these as commodities.