Copper is more than the main ingredient in wire, and gold is more than what people wear on their fingers and around their necks.
These commodities, along with others like oil and grains, are used by investors to gauge the health and short-term direction of the market. But how does it work? What do commodity prices tell us that we can use as traders?
This article discusses specific commodities and how they can help predict market movement.
- Gold is a commodity that investors flock to when the market heads downward as gold is considered a stable asset because of its physical nature compared to paper currencies or other securities.
- When investors see an increase in investments into gold ETFs or gold futures, it can indicate a possible negative market turn.
- Copper is widely used in the industrial and real estate sector as it is the main component in wiring and motors, therefore, investors can gauge the performance of the commodity as an indicator of the health of those markets.
- Oil is used in almost every facet of life, from gasoline to jet fuel to plastics. The price of oil is always a hot topic and because some of the largest companies in the world deal in it, oil's price movements have a large impact on the global economy.
Gold is one of the best-known commodities because it appeals to investors and non-investors alike. Consumers may not think of gold as a product to invest in, but the story of gold is long and varied. Not only does it serve as a commodity, but also as a currency.
Traditionally, gold tends to move in the direction opposite the market. Investors use it as a market hedge, dumping money into the commodity when the market is trending lower. In times when it is acting as a commodity in a stable market, investors watch gold closely.
When they see money pouring into SPDR Gold Shares (GLD), an exchange traded fund (ETF) that tracks the performance of gold, or gold futures markets, they believe that a market downturn may be close at hand and react accordingly.
Copper doesn't have the allure of gold since it's a base metal used largely for industrial purposes, but that doesn't change the fact that investors watch it closely for hints of the overall market sentiment. Because copper is an industrial metal, investors use it as a way to gauge the health of the manufacturing and housing sectors of the world's economies.
Investors also use copper as a way to gauge trader sentiment. When copper is rising, some see that as investors having an appetite for risky assets, since copper is known as a volatile commodity. When copper loses value, it may indicate that investors are selling risky assets and a market correction may be imminent.
Oil is talked about every day and everywhere given the fact that the products derived from it impact almost every person on a daily basis. This includes gasoline for cars, jet fuel for planes, heating oil for homes, plastics for so many products, and more.
Oil, and the way it is priced and traded, is so important to many companies that the shift in oil prices can have huge ramifications on the global economy, impacting the stock prices of all companies directly or indirectly involved with it.
For example, if chaos in the Middle East cuts off oil supplies, the price of oil will skyrocket, making it expensive for companies to purchase. That cost is passed onto consumers in the increased cost of gas and products made from oil.
The changes in oil prices as such impact the profitability of oil companies and, therefore, their share prices and the investors that hold their shares.
The oil futures market provides an incredible amount of insight into global finance.
If investors could look at the performance of these commodities and gauge the movement of the market, then everybody would be rich, so it must not be that simple. In fact, many experts believe that other factors, such as ETFs, have an artificial impact on the price of commodities.
The SPDR Gold ETF holds gold in its London vault equal to the value of the fund. With a large amount of gold out of circulation, that may drive the price of gold up.
In 2008, oil speculators were blamed en masse for the run-up of oil prices, but others claim that with the massive amounts of money pouring into commodity markets, such as oil, a few large investors making predictions about the future direction of a commodity could artificially move the price.
All of these factors combine to make analyzing moves in commodities an educated guess that can only be used in combination with other factors.
The Bottom Line
Although commodities may not move based strictly on supply and demand, investors use their price movements to gauge the overall sentiment of the market and make short-term decisions of where the market may go. Start watching these commodities and see if they predict the market corrections that are sure to come.