Commodities

Commodities are essential to global infrastructure. The Oxford Dictionary defines them as ‘a raw material or primary agricultural product that can be bought and sold.’ There are two main types:

Hard commodities – natural resources like oil, gold, and industrial metals

Soft commodities – agricultural products such as wheat, coffee, and cotton

Commodities are traded like other assets, however, they are far more essential in shaping the global economy. I have explained a few reasons below:

1) Commodities Drive Inflation and Central Bank Policy

When commodity prices spike, it directly hits the economy:

• Higher food and fuel costs push up the Consumer Price Index (CPI), the primary inflation measure.

• Central banks may respond by raising interest rates to cool demand and keep inflation in check.

This link is a key indicator analysts use for potential future monetary policy shifts.

2) They Affect Input Costs and Profit Margins

Commodities are the raw material inputs for many businesses. When these prices rise:

• Companies face higher production costs.

• Unless they can pass those costs onto consumers via price hikes, profit margins are squeezed.

Analysts track commodity prices closely to adjust earnings forecasts, particularly for sectors like industrials, manufacturing which are directly impacted by these input costs.

3) Geopolitical Sensitivity and Fragile Supply Chains

Many commodities rely on fragile supply chains that are easily disrupted by geopolitical shocks e.g. wars or export bans.

• These disruptions can spike prices and distort markets.

• Countries that depend heavily on commodity exports (like Canada or Brazil) see their currencies move with global commodity changes.

4) Safe Haven Status During Volatility

Gold particularly is viewed as a store of value during economic distress:

• During market sell-offs or periods of uncertainty, investors move into gold as a defensive play.

• Conversely, during economic booms, gold can underperform riskier assets like equities.

I hope this has been a useful guide to one of the backbones of global markets. For the rest of the articles click here!