What makes a thing a commodity? When does a fur become a commodity? What about gold? Coffee? Well, the source of the word is “benefit” in Old French. Meaning, that to be a commodity, a product must first fulfil a need. Second, it needs to be tradeable, which makes things a bit more complicated. We need to be able to weigh the commodity in standardized units.

Which brings us to the third requirement – fungibility. What THAT means is that each unit of the commodity must be interchangeable with another. Someone define the unit – usually the exchange where commodities contracts are made signed. So in gold, for example, the standardized unit is one troy ounce of 24 karat gold. In coffee, we usually talk about a kilogram of either Robusta or Arabica coffee. So in coffee, we have two different products that cannot be swapped. The same is true for oil. The two main types of oil traded on commodities markets are Brent oil from the North Sea and West Texas Intermediate, from the US. Brent contains more Sulphur. is denser and slightly more expensive.

Now, like everything else on the market, commodities are priced through supply and demand. The higher the demand and the lower the supply – the higher the price. The lower the demand, the higher the supply – the LOWER the price. Supply can be threatened by war, for example, which will push up the price of futures. An excellent example is oil from the Middle East. There we have the consortium of Oil Producing Nations, which, for example, created a false shortage in the 1970s. The result was a huge jump in oil prices. Then, in 2014, Saudi over production to maintain market share resulted in an equally dramatic plunge.

And prices are also influenced by market sentiment. That’s the reason that gold, which has very little actual USE, is considered valuable. It’s rare, its supply is limited by the countries that produce it.

When we TRADE commodities, we need to be aware of the division of them into four classes – metals, livestock, agriculture and energy. We also describe commodities as either hard or soft. Hard commodities are formed from natural resources that we extract from the earth, while soft commodities are those that are raised – agriculture and livestock, primarily.

We also need to be aware of where a commodity is traded, since both the contracts and derivatives can only be traded when the markets are open. So, for example, agricultural commodities and livestock are traded on the Chicago Board of Trade. Metals are traded primarily at the London Metal Exchange, wool at the Australian Securities exchange, and so on. None of these are exclusive – you can also trade coffee in Kenya, metals in Manila and precious metals in Cambodia.

Then again, if you don’t have a huge cellar, you might want to consider trading CFDs instead of actual coffee or steel. The various markets are more easily accessed from your desktop or mobile. You don’t need to be a licensed commodities trader, it’s easier to short the commodity, and you don’t need NEARLY as much start-up capital.