The Pursuit of Positive Returns Starts Outside of Trading Charts
The commodities market is always under pressure from external sources. Indeed, when you look at traditional factors that impact the price of oil, metals and produce, political and economic tensions are top of the list. As noted by IG’s guide to how commodities work, the effects of outside forces on commodities goes back to 1861 and the American Civil War. With the civil conflict interrupting cotton bale exports from the US, mills in the UK were left with fewer resources to work with. The end result was an increase in demand for cotton and, therefore, an increase in price from $0.10 per pound to $1.69+ per pound.
Physical Pressures Put Commodities Under Stress
In more recent times, World War I pushed up the price of wheat from $0.98 per bushel to $2+. Why? Again, because demand outstripped supply due to slowdown in production and exports. However, what’s interesting to note is that not all movements are predicated on a physical impediment. Although factors such as the weather can dampen the price of certain commodities, especially produce, there are more ethereal issues that can come into play. As noted in the overview of commodities and how they work, Brexit caused a dip in the price of gold. With banks, businesses and investors unsure how the UK’s breakaway from the Europe Union would pan out, the precious metal market was sent into a spiral.
In fact, what was interesting to note here is how the commodities and forex markets became intertwined here. As the price of gold was fluctuating, so too was the value of major currencies such as GBP, EUR and USD. Because banks use gold as a security, dramatic movements in its value can cause currencies to take similar turns. Becoming even more ethereal, political ideologies also put pressure on the markets. Throughout 2018, the US/China trade war has seen the price of tin taken a tumble. With sanctions on both sides leading to a slowdown in tin exports from the US to China, the latter’s battery industry has had to pay a higher price to make their products.
Changing Times Lead to Changing Prices
Although Scotiabank’s Rory Johnston believes political tensions won’t hurt the metal market in 2019, the pressure is always there. Beyond that, the rise of the internet has also caused the commodities market to move. Due to the advent of online trading platforms, more people now have the ability to invest in an affordable way. Inside the IG Android App, 15,000+ markets, live charting and low spreads are accessible to traders of all levels. Regardless of knowledge or experience, these apps and sites have opened up the commodities market to more people which, in turn, has increased liquidity.
Today, commodities trading is as vibrant as it’s ever been. What’s important to remember, however, is that things don’t take place in a bubble. Whether it’s physical factors such as war or ideological differences, the laws of supply and demand are always dictated what’s going on outside of the markets themselves. Moving into 2019 and beyond, this dynamic won’t change. For investors at every stage of their career, that’s important to remember in the pursuit of positive returns.
