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Commodities
Question: What are Commodities
Answer: Commodities are tangible good for which there is demand, but which are supplied without qualitative differentiation across a market. This means they are equivalent no matter who produces them. For example, are oil, natural gas, gold, zinc, copper, newsprint paper, milk or wheat are all commodities. The price of a commodity, for example copper, is universal and fluctuates daily based on the global supply and demand. Televisions ro automobiles, on the other hand, have many aspects of product differentiation, such as the brand, the perceived quality, etc. And, the more valuable a TV or car is perceived to be, the more they will cost.
One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.
There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.
Some people buy and sell commodities based on speculation. For example, if you thought hurricanes over Latin America were going to be particularly severe this year and destroy much of the coffee crop, you might call your commodity broker and have them purchase coffee on your behalf. If you were correct, the price of coffee would rise sharply because the crop had been harmed by the weather, making the surviving harvest more valuable.
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