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Fundamental
Analysis
Fundamental analysis, in essence, comes down to studying the
factors affecting supply and demand. When supply is great
relative to demand, prices tend to fall. When demand is large
relative to supply, the price of a commodity rises. But beyond
those simple and obvious principles, there's a world of
complexity. What, after all, affects supply and what influences
demand?
Some general factors affect all commodity prices. Taxes,
inflationary pressures and money supply, political events,
weather, transportation costs and technological changes all
play a part along with a dozen other large-scale causes.
Beyond those general factors, the detailed answers depend
heavily on which commodity a trader researches.
'Softs' - sugar, cocoa, coffee and a few others - are
agricultural products in demand all over the world by millions.
One of the reasons they make excellent commodities. As such,
their demand is affected mostly by price with some minor
influence from cultural factors. Sugar demand is suppressed
slightly, for example, by newspaper horror stories about the
alleged evils of consumption and obesity. Supply, on the other
hand, is influenced by weather, soil quality and moisture
levels, transportation costs, insect population changes,
etc.
Energies, such as crude oil and natural gas, on the other hand
show almost the opposite profile. Supply grows very slowly,
owing to technological and political factors, while demand has
been rising for decades with no end in sight. For example,
China's economy is growing as is India's. In both cases, this
produces a heavy demand for energy to build new buildings,
increase manufacturing plants, heat and power homes and a
hundred other uses.
Fortunately, no matter what commodity an investor considers,
there is a host of data sources available.
Crop and weather reports from the USDA (U.S. Dept of
Agriculture), available directly or through your broker, are
just one example of a major source of information about softs
or grains.
Mining levels, information about new sources of gold, silver,
platinum and a dozen other factors affecting supply are
similarly easy to obtain, often through the exchanges
themselves. (See http://www.thebulliondesk.com/ or
http://www.amm.com/ as just two examples.)
One could hardly avoid hearing news about oil, which is
discussed endlessly on the front pages of newspapers. Behind
the scenes things get even more interesting. Offshore Engineer,
for example, is just one excellent source of information about
offshore oil news. (See http://www.oilonline.com/oe/)
Coffee is the second most widely traded commodity, after oil.
That tells you something about the world. It's grown in a dozen
countries and has been a popular product for over 200 years.
Recently, however, prices have been depressed owing to large
supplies, even though demand remains strong.
Coffee trading is here to stay, though. For data see the
International Coffee Organization website: http://www.ico.org/
and in particular the statistics page at
http://dev.ico.org/trade_statistics.asp. For current prices
see: http://dev.ico.org/prices/pr.htm
Fundamental analysis in commodities trading runs counter to one
basic difference with the stock market, however. Stock trading
professionals trade every day, but the average investor tends
to take a slightly longer view. In commodities trading, almost
all investors trade short term. Supplement any fundamental
analysis with technical analysis to get the best possible
chance for profits.
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