Commodity Investing Basics: Price Rationing
More Commodity Investing Basics…
In recent issues, we’ve been discussing the basics of commodity investing.
Since there’s an abundance of new readers here at Commodity Trading Research, I want to make sure everyone has a primary understanding of this essential asset class.
So far we’ve discussed what commodities are, where the major markets that trade them are located, and who trades them. We also discovered what influences the price of these assets over the course of time.
If you missed those articles be sure the take the time to read them here and here.
Today we’re going to discuss an essential question…
Why do commodity markets exist in the first place?
On the surface, the question may sound silly.
You may answer…
“Well, why wouldn’t they exist? Commodity markets are an essential part of capitalism, just like the stock market.”
In reality, the statement above is only partially true. Yes, the commodity markets are an essential part of capitalism and the global economy.
But the truth is, commodity markets exist for a very different reason than the stock market.
You see, in its most basic form, the stock market exists so companies can raise money. In the Initial Public Offering (IPO) process, companies exchange ownership shares of their business for capital.
But what about commodities?
Being natural resources derived from the earth, they’re clearly not a business in need of capital.
So let me ask again.
Why do commodity markets exist?
Commodity Markets Serve An Essential Function To Society…
There are some hard facts of life here on planet Earth. You know, things like gravity. Jump off the top of your house and you’ll probably break a leg- or worse.
Here’s another hard fact of life…
Natural resources are finite.
In other words, there are only so much of certain commodities to go around.
Take gold for example. Scientists believe the extremely rare metal was created by the fusion of stars many billions of years ago and deposited here on Earth by asteroid impacts.
One thing’s for certain, there’s a finite amount of gold on our planet. Same goes for oil, natural gas, silver, and a slew of other commodities.
And that creates an issue…
Since mankind’s wants and needs are unlimited, the Earth’s natural resources must be rationed.
And that’s where the commodity markets come in. Through the price rationing system, only those that are willing and able to pay the price for a particular commodity can buy it.
Make sense?
Let me explain it another way.
Commodity markets exist so the laws of supply and demand can ration the Earth’s major resources.
For example, the higher the price of gold, the smaller the percentage of society that can afford to buy it. Therefore, the metal is rationed by price.
Price Rationing And Commodity Investing…
Now that you know why commodity markets really exist, does it change the way you think about commodity investing?
Maybe it will, maybe it won’t.
When you get right down to it, all you really need to understand about commodity investing is this…
Prices fluctuate based on investors’ collective perception of supply and demand.
If market participants believe demand is too high relative to supply, prices will rise. If supply is too high relative to demand, prices fall.
Sounds simple right?
Of course, it’s figuring out these fundamental factors, along with technical analysis and other market dynamics, that can make commodity investing challenging.
But that’s why I’m here…
To help you understand all the various aspects of commodity investing with the ultimate goal of profit!
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Commodity Trading
