Commodities are standardized raw materials or basic goods that are interchangeable with others of the same type. They form the backbone of global trade—from energy like oil and natural gas to agricultural products like wheat and corn, to precious metals like gold and silver.
Types of Commodities
Commodities divide into two categories. Hard commodities are natural resources: crude oil, natural gas, gold, silver, and iron ore. Soft commodities are agricultural products and livestock: wheat, corn, soybeans, coffee, and pork. Each trades on dedicated exchanges with standardized contracts.
What Drives Commodity Prices
Commodity prices fluctuate based on supply and demand, geopolitical events, economic cycles, and weather. A supply disruption from a major producer, for instance, can spike prices across the market. These factors make commodities sensitive to both macroeconomic trends and unexpected shocks.
Why Traders and Investors Track Commodities
Commodities serve multiple purposes. They signal broader economic health—rising commodity prices often precede inflation. Precious metals like gold can hedge against inflation and currency devaluation. Commodities also diversify portfolios uncorrelated with stocks and bonds. However, commodity markets are volatile and subject to geopolitical risk, requiring careful risk management.
Commodities vs. Other Asset Classes
| Feature | Commodities | Stocks | Bonds | Forex |
|---|---|---|---|---|
| Nature | Raw materials | Company ownership | Debt securities | Currency pairs |
| Risk | High, market and geopolitical | Moderate to high | Low to moderate | High, economic factors |
| Liquidity | Varies by commodity | Generally high | Varies by bond | Very high |
