Ever wondered why the price of your morning coffee keeps changing? Or why fuel costs sometimes feel like a rollercoaster ride? Welcome to the world of commodities-a market driven by a mix of real-world supply and demand and a bit of trader speculation. 

Let’s break it down in a simple and engaging way!

Why do commodity prices fluctuate?

Commodity prices don’t move randomly; they respond to a mix of fundamental and speculative factors. Think of it like baking: fundamentals set the base, speculation adds the flavour.

The fundamentals: Real-world influences

Supply and demand: The classic economic rule. When supply is low and demand is high, prices rise. For example, gold prices often increase during wedding seasons in India due to high jewellery demand.

Weather and natural disasters: Mother Nature plays a big role, especially for agricultural commodities. A drought in a coffee-growing region? Expect higher prices for your daily brew.

Geopolitical events: Political conflicts can shake up commodity prices. The Russia-Ukraine war, for instance, led to surging oil and natural gas prices due to supply disruptions.

Economic health: A booming economy means more demand for industrial metals like copper. If growth slows, demand, as well as prices, can drop.

Currency exchange rates: Since many commodities are priced in US dollars, a stronger dollar can make them more expensive for international buyers, reducing demand and lowering prices.

Government policies: Tariffs, subsidies, and environmental regulations can impact commodity production and trade.

Technology advances: Innovation can shift supply and prices. Take fracking, which revolutionised oil production and lowered crude prices.
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Speculative factors: The market's wild side

Beyond fundamentals, traders and institutions add another layer of price action:

• Investor sentiment: If traders believe oil prices will rise, they may start buying, driving prices up-even before actual supply issues occur.

• Hedge Funds and Speculators: Big players can push markets up or down with large trades.

• Market liquidity: Thinly traded commodities (like some rare metals) are prone to bigger price swings.

• ‍Technical analysis: Traders look at charts, patterns, and historical data to predict future price movements.

• Options and futures: These financial instruments influence spot prices, introducing terms like backwardation and contango (terms describing how future prices relate to spot prices).

• ‍Speculative bubbles: Sometimes, everyone jumps on a trend, pushing prices way too high until the bubble bursts.
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Explore the commodities market with confidence

With a better understanding of how commodity prices move, you’re one step closer to making smarter trading decisions. Want to try it out risk-free? Practise with a free demo trading account and start exploring the commodities market today!

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