The world of commodities is a complex one, with a wide range of definitions, functions and characteristics that can have a profound effect on the global economy. This article will provide a comprehensive guide to understanding what a commodity is, its function and characteristics, and the implications of commodities for the global economy.
Definition
A commodity is a generic term used to describe a good or service that is interchangeable with others of the same type. commodities are typically traded between parties in a futures market, where buyers and sellers agree to trade a specific quantity of a commodity at a predetermined price at a certain time in the future. Commonly traded commodities include energy, metals, grains, and agricultural products.
Function & Characteristics
commodities are often seen as a hedge against inflation and as a safe-haven asset in times of economic uncertainty. This is because commodities are backed by a physical asset, meaning their value is not subject to the same market forces as stocks and bonds. As such, commodities can provide some protection against market volatility and provide an investor with steady returns over the long-term.
Fiat currencies, such as the US dollar, are not backed by a physical asset and are instead issued and regulated by a country's central bank. This means that their value is subject to the same market forces as stocks and bonds and can be affected by inflation, political instability, and other economic factors.
Implications
The global commodities market is constantly in flux, with prices fluctuating based on supply and demand. At the same time, concern about a global recession means commodities prices have started to cool, along with exports, one reason the OECD recently downgraded its global growth forecasts.
Recent developments in the commodities market have also seen increased regulation of commodities, such as the European Council and Parliament's provisional agreement on a directive that puts obligations on firms that use six commodities, and the European Parliament's push for a wider definition of forest degradation.
Conclusion
It is clear that the commodities market is a complex one, with a wide range of definitions, functions and characteristics that can have a profound effect on the global economy. By understanding the implications of commodities, investor can make more informed decisions and have a better chance of achieving long-term success.
