Commodities - Fundamental Analysis

Fundamental analysis, in essence, comes down to studying the factors affecting supply and demand. When supply is great relative to demand, prices tend to fall. When demand is large relative to supply, the price of a commodity rises. But beyond those simple and obvious principles, there's a world of complexity. What, after all, affects supply and what influences demand?

Some general factors affect all commodity prices. Taxes, inflationary pressures and money supply, political events, weather, transportation costs and technological changes all play a part along with a dozen other large-scale causes.

Beyond those general factors, the detailed answers depend heavily on which commodity a trader researches.

'Softs' - sugar, cocoa, coffee and a few others - are agricultural products in demand all over the world by millions. One of the reasons they make excellent commodities. As such, their demand is affected mostly by price with some minor influence from cultural factors. Sugar demand is suppressed slightly, for example, by newspaper horror stories about the alleged evils of consumption and obesity. Supply, on the other hand, is influenced by weather, soil quality and moisture levels, transportation costs, insect population changes, etc.

Energies, such as crude oil and natural gas, on the other hand show almost the opposite profile. Supply grows very slowly, owing to technological and political factors, while demand has been rising for decades with no end in sight. For example, China's economy is growing as is India's. In both cases, this produces a heavy demand for energy to build new buildings, increase manufacturing plants, heat and power homes and a hundred other uses.

Fortunately, no matter what commodity an investor considers, there is a host of data sources available.

Crop and weather reports from the USDA (U.S. Dept of Agriculture), available directly or through your broker, are just one example of a major source of information about softs or grains.

Mining levels, information about new sources of gold, silver, platinum and a dozen other factors affecting supply are similarly easy to obtain, often through the exchanges themselves. (See http://www.thebulliondesk.com/ or http://www.amm.com/ as just two examples.)

One could hardly avoid hearing news about oil, which is discussed endlessly on the front pages of newspapers. Behind the scenes things get even more interesting. Offshore Engineer, for example, is just one excellent source of information about offshore oil news. (See http://www.oilonline.com/oe/)

Coffee is the second most widely traded commodity, after oil. That tells you something about the world. It's grown in a dozen countries and has been a popular product for over 200 years. Recently, however, prices have been depressed owing to large supplies, even though demand remains strong.

Coffee trading is here to stay, though. For data see the International Coffee Organization website: http://www.ico.org/ and in particular the statistics page at http://dev.ico.org/trade_statistics.asp. For current prices see: http://dev.ico.org/prices/pr.htm

Fundamental analysis in commodities trading runs counter to one basic difference with the stock market, however. Stock trading professionals trade every day, but the average investor tends to take a slightly longer view. In commodities trading, almost all investors trade short term. Supplement any fundamental analysis with technical analysis to get the best possible chance for profits.

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