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Valuing Commodities

Futures

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The process for valuing commodities involves looking at their current market price, and their expected demand/supply balance in the future. The expected demand versus expected supply spurs purchase or sales, which results in price changes in the present. When investors expect prices to rise in the near future, they invest in commodities, raising prices. When they expect prices to fall, they sell their commodities, lowering prices. Valuing commodities, in this aspect, helps bring expectations into reality as traders’ attempts to preempt the future accelerate it into the present.

Commodities are excellent retainers of value, as long as they are in production demand. Many commodities were once used for currency standards. Ever hear of the phrase, “gold standard”? Instead of being backed simply by national economies, currencies were once backed by commodities. The gold standard nations were backed with gold, the silver standard with silver, and so on. These metals were actually used in coin, or as coin, and commonly traded as unofficial currency.

Commodities increase in demand during times of inflation and recession. Instead of crashing when inflation hits, many commodities rise in value. More money chasing the same amount of raw materials results in higher nominal prices for commodities. They rise instead of fall with inflation. When markets are crashing, Investors often race each other to be first in line to acquire commodities. This is fairly logical. Companies may come and go, weakened by recessions and inflation, but commodities will still be used long after they’re gone. These raw materials are the base of all manufacturing.

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