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Anything that represents some value, can be in the form of a good or service (offered as a product) and can be traded purely on the basis of its price is termed as commodity. The word commodity has been derived from the French word “commodite”. Around 15th century, people started using this word in English language. There are three characteristics of a commodity: use value, exchange value and a price. Commodities are very often used for trading. They are therefore commonly known as commodity derivatives. Commodity derivatives are usually different from financial derivatives. Commodity derivatives create the need for warehousing and quality plays an equally important role. But a financial derivative is completely cash based.
Investment in commodities market requires a complete understanding of the product, behavior of the market and forecasted data. There are a couple of indicators that can give a trend about the expected behavior of the market. A few of them are standard deviation, basis, coefficient of correlation, simple moving average, Bollinger bands, MACD and Fibonacci support and resistance levels. Standard deviation can be used to judge the level of volatility. It shows the diversion that can happen to a variable. Basis is used to see the difference between future price and ready price of a commodity available for trade. A positive value of basis shows a lower side of supply of commodity whereas a negative value shows the market as comfortable in terms of available supply. Simple moving average is one of the most popular methods of forecasting in Statistics. It shows the average value of commodity over a period of time. Scatter diagram can be used to see the average trends of the price. A Bolloinger band (developed by John Bollinger) is another popular parameter of judging the condition of market. There are three parts in this indicator: one is the middle level SMA (Simple Moving average), second is the upper level (SMA +2*standard deviation) and third is the lower level (SMA-2*standard deviation). A Bollinger Band cannot be used as an independent indicator. It is used in conjunction with MACD (Moving Average Convergence Divergence) or RSI (Relative Strength Index). MACD is regarded as one of the most reliable indicators of forecasting. It is completely based on the concept of moving averages. A Fibonacci support and resistance level show the meeting point of demand and supply and accordingly predicts the trend. If studied carefully, these indicators help an investor in making wise decision.
The current trend of commodities market highlights many interesting aspects. According to the survey by Structured Products World 2007, there are a lot of benefits in investing in structured products. Around 44% of the investment preference is for commodities. According to Forbes, following are the major trends of some of the world’s leading stocks: World Energy Stock Index is moving at price 480.45, Americas Energy Stock Exchange at 579.42, Pacific Energy Stock Index at 247.41and Europe Energy Stock Index at 391.50. Also, Gold and commodities (oil and natural gas) have become popular among the investors.
