Hi,
We will be discussing how macroeconomic factors affect the prices in commodity markets in this video. Commodity prices are also influenced by multiple factors, as in the case of stocks. The foremost important factor that affects commodity prices is basic demand and supply dynamics. As the demand for the commodity increases, the prices go up, and higher the supply of a commodity vis-Ã -vis demand, the price of the commodity falls.
Now, what is important here, is to understand the factors which affect this demand and supply. Seasonality is important to study for commodities. Most commodities follow a certain timing and schedule of a production cycle, which impacts the trend of the price.
For example, in agricultural commodities, like wheat, rice, chana, etc., when it is the harvesting season, there is an increased supply, hence, prices tend to come down, whereas during the sowing season, the supply is comparatively lower, with demand being the same, which leads to inflated prices. The second important factor to study is the News. Commodity prices are sensitive to news and data. Any important news related to a particular commodity can affect its prices in the short term.
The next factor to keep in mind is Geo-political developments. The best example to talk about here, is of crude oil prices. Saudi Arabia is a major exporter of crude oil, and a price war led by it, has resulted in a major drop in crude oil prices.
The next factor to be kept in mind is Macroeconomic conditions. The domestic and global macroeconomic conditions impact the commodity prices largely. The GDP growth rate, consumption pattern, per capita income, industrial production, employment rate, inflation rate, etc. are the deciding factors for the price movements of a commodity, both in the short and the long term. One more important factor that affects commodity prices is currency.
Comparative movement in the value of a currency of a country, in relation to major global currencies, has an indirect impact on the end-user prices of commodities. Most of the commodities are traded in US dollars globally. So, when the currency of a particular country appreciates or depreciates against the USD, the price of the commodity in that particular country becomes cheaper or expensive, as the case may be.
The Next factor is interest rates, which are also one of the key variables for commodity price movements. High interest rates could reduce the market prices of commodities and vice versa. We shouldn’t be ignoring some more obvious factors like weather. It is an important factor that impacts the production of agricultural commodities in different parts of the world.
So, by all means, we have to track all these factors, monitor the news and developments in various countries, be updated with the weather reports, and then assess the expected price movements the in commodity markets.
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