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 a cake-some ingredients (fundamentals) set the base, while others (speculation) add unexpected flavors.

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 jewelry 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—and 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 revolutionized oil production and lowered crude prices.
‍

‍

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 (fancy words for how future prices compare to today’s prices).

Speculative Bubbles: Sometimes, everyone jumps on a trend, pushing prices way too high-until the bubble bursts.
‍

‍

‍

Ready to trade commodities?

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? Open a free demo trading account with Deriv and start exploring the commodities market today!

‍