Where are commodities traded?
Commodities are bought and sold on a number of exchanges specialising in a particular type of commodity.
LIFFE
The London International Financial Futures and Options Exchange is the largest trading floor for commodities in Europe
Speciality
Soft commodities: cocoa, wheat, coffee, sugar, corn
New York Mercantile Exchange (NYMEX)
The world’s largest physical commodities futures exchange
Speciality
Energy and metals: crude oil, natural gas, heating oil, RBOB unleaded gas, gold, silver, copper, platinum, palladium
London Metal Exchange
The world’s leading non-ferrous metals market
Speciality
Metals that do not contain iron: aluminium, copper, tin, nickel, zinc, lead, aluminium alloy, cobalt
ICE Futures US
A leading global soft commodities futures and options exchange
Speciality
Soft commodities: sugar, cotton, cocoa, coffee, orange juice
Chicago Board of Trade (CBOT)
The world’s oldest futures and options exchange
Speciality
Grains: corn, soybeans, soybean oil, soybean meal wheat, oats, rough rice
Contract size
Commodity futures are traded in contracts. Each commodity market has a standard size, set by the futures exchange where it trades. As commodities are often bought and sold in large amounts, the contract size also tends to be large.
Let’s take gold as an example. The contract size for gold futures is 100 troy ounces. So if gold is trading at $1100 per troy ounce and you buy just one contract of it, your contract would be worth $110,000 (1100 x 100 ounces).
Small investors generally don’t have access to such large amounts of money, so just like when trading forex, you can often trade commodity futures on leverage. Many exchanges and brokers also offer ‘mini’ contracts, which tend to be between 10% and 50% of the size of a standard contract.
It’s very important to note that both standard and mini contract sizes vary widely depending on the type of commodity – so it’s vital to check the contract size carefully before placing a trade.
Question
The contract size for silver is 5000 troy ounces. If you bought 10 silver contracts at $17.05 per troy ounce, and the silver price then rose to $17.15, how much profit would you have made in dollars?
Reveal answer
What drives commodity prices?
As with all trading, the most important factor that affects commodity prices is the balance between supply and demand.
If, for example, there’s a good cotton crop which boosts the amount in circulation – the price of cotton will decrease (assuming that demand remains the same). On the other hand, if clothes manufacturers and other companies using cotton need more of the commodity, but producers don’t have the capacity to match this demand, the price will increase.
Other factors that drive commodity prices include:
The weather
Agricultural commodities are particularly dependent on the weather as it influences the harvest. A poor harvest will result in low supply, causing prices to rise.
Economic and political factors
Events such as war or political unrest can have a big effect on prices. For example, turbulence in the Middle East often causes the price of oil to fluctuate due to uncertainties on the supply side.
The US dollar
Commodities are normally priced in US dollars, so their prices generally move inversely to it. If the price of the dollar falls, it takes more dollars to buy the same amount of commodities – so the price of commodities rises. Conversely, if the dollar goes up then it’s cheaper to buy commodities, all things being equal.
