Who Sets the Price of Commodities
The term “Commodities” is defined as the products derived from the primary economic activity such as agriculture, mining, drilling, etc, rather than the manufactured products or services. Commodities are also traded in the financial market with the intention of discovering a commodity’s true price in the form of options, futures, swaps, derivatives, Gold, crude oil, copper, silver, corn, natural gas and in other commodities.
The Online trading takes place on various exchanges in India and is regulated by the Security and Exchange Board of India (SEBI). In India there are six commodity exchanges, which are given below-
1. Multi Commodity Exchange (MCX)
2. National Commodity and Derivative Exchange (NCDEX)
3. National Multi Commodity Exchange (NMCE)
4. Indian Commodity Exchange (ICEX)
5. Ahmedabad Commodity Exchange
6. Universal Commodity Exchange (UCX)
How are Commodity prices determined?
Let us understand the factors by which the commodities price determined.
• Demand and Supply- Commodities prices, like all other are prices are controlled by the demand and supply chain concept. Traders put buy or sell order on commodity exchange. Demand and supply of commodity market are influenced by a number of factors. For instance, during an extreme cold weather, the demand for heating may increase which lead to increase in demand of resources such as natural gas. During the festivals like Diwali and other the demand for bullions will increase.
• Macroeconomic and Geopolitical Factors- Commodities tend to be sensitive to geographical factors and economic factors at large scale. For example, political or economic instability in one or more countries may affect the price of crude oil because other countries are producing crude oil at a large scale.
• Trading by Speculators- Speculators are the market participants who enters into the commodity market with a primary goal of benefitting from the price fluctuations without physically possessing the underlying products. For instance, some of the people feel that the future outlook of a particular commodity is very promising then will start buying the commodity in a large number which in turn to increase the price of the underlying commodity. Speculators in the commodity market may be the institutional investors.
• Economic Growth- The prosperity of a country can also effects the price of commodity market. Economic prosperity of a country helps to determines the purchasing power of its population.
• Transportation and storage costs- This is not although a major factor but transportation costs can also play a part in moving the commodities prices. For example- crude oil tankers sometimes double as storage facilities during the time of oversupply.
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