MONEY
Introduction to Commodities F
product of the same type, or that investors can buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand.
rom the orange juice we drink to the gas we use to power our cars, commodities play important roles in our daily lives. They can be found literally all over the world, and can be traded on the global marketplace. In fact, billions of dollars are invested in commodities every day.
Common Commodities Markets Metals: Gold, silver, copper, platinum and palladium Energies: Crude oil, heating oil, gas, natural gas, crude oil brent, ethanol futures Grains: Wheat, corn, soybeans, soybean meal, soybean oil, oats, rice, red wheat, spring wheat, canola Meats: live cattle, feeder cattle, lean hogs, milk Softs: Cotton, orange juice, sugar, coffee, cocoa, lumber
Whether they are traded on the ‘spot’ or on ‘futures market’ the goal in commodities trading is to buy low and sell high. But what does this mean to the Dubai and our business? Over the last three decades Dubai has become one of the most important centers for imports, exports, and re-exports in the region, and has worked to strengthen its industrial base with the aim of expanding sources of income. The result of which is that Dubai is now recognised as one of the trade centers in the Arabian Gulf region, and growth is expected to continue especially in manufactured goods. This development means that commodities are central to UAE’s commerce and growth, and as such our business. If commodities is one of the biggest income sectors in Dubai and is set to grow even more, then surely we should be looking at this market to either invest in as a business and/or privately, and most definitely as a revenue stream for our services/ products. To help you understand the potential of this market and impact on your business, we have chosen to run a series of articles on commodities; what they are, how they work, why this market has continued to grow during the recession, what to be aware of, and how to trade if you are interested. So let’s start from the beginning and spell out the basics! Definition of a commodity A physical substance, for example food, grains, and metals, that can either be traded with another
“I buy when other people are selling”
J. Paul Getty (1892–1976)
History of commodities Modern commodity markets have their roots in the trading of agricultural products and since ancient Sumerian times the world has tried to standardised this exchange. This started with small baked clay tokens in the shape of product being traded, e.g. sheep or goats, being sealed in clay pots with their number written on the outside of the pot representing a promise to deliver that number by a certain date; a futures contract. Regardless of the details stated on the outside of the pot, it was only possible to verify the number of tokens inside by shaking or by breaking the pot, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. The economic impact of the development of commodity markets is hard to overestimate. Throughout the 19th century the exchange of commodities have led to innovations and improvements in transportation, warehousing, and financing; and has paved the way to expanded national and international trade. Reputation and clearing became central concerns to trade, and the countries which could handle them most effectively became powerful empires, trusted by many to manage and mediate trade and commerce. Being a hub of trade means money to a country.
March 2013
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