This blog post will go through the many interesting price changes in commodities like gold and oil, as well as discuss what’s next for investors. It also includes a bullish outlook on the stock market.
Despite key inflation data, commodities are back on the rise – what’s next?
As crude oil prices continue to soar, it is becoming more apparent that inflation won’t be slowing down anytime soon. This has led to speculation that investors should consider commodities like gold and crude oil futures instead of stocks in hopes of higher returns over time. Major banks are now starting to invest heavily into these sectors with their own funds as well.
Gold is currently trading at $1,450 an ounce, up from $1,280 three weeks ago. Silver is even higher at $31.50 an ounce, up from $30.10 three weeks ago. Silver has also shot up to over $50 a barrel on the New York Mercantile Exchange.
The reason for this dramatic shift in precious metals prices can be attributed to the rise in inflation measures, including the Consumer Price Index and Producer Price Index. These measures showed that retail prices grew by 0.5% in July and 1% in August after seasonal adjustments. Furthermore, producer prices are up at 2%.
Commodity Markets Fundamental Analysis
To understand the fundamentals of the commodities markets, we must first go over how commodities are priced. It is a general understanding that markets price according to supply and demand. In a perfect world, prices would be determined by the supply and demand of little Johnny’s football card collection as well.
The model for pricing commodities is composed of three factors:
Commodity Cost: The cost to produce goods or services in an industry Demanded Quantity: How much consumers demand in goods or services Total Quantity: A company’s output or supply. These factors are then manipulated mathematically to come up with the current price of that commodity. Let’s take a look at each of these components individually.
Commodity Cost:
The cost of the good or service is broken up into three categories: Variable costs, fixed costs and semi-fixed costs. All costs involved with producing the commodity are included in this category. Examples of fixed costs are the cost of electricity and the cost of raw materials like gold. Examples of semi-fixed costs are the salaries of staff involved with producing the commodity.
These costs affect prices in different ways. Semi-fixed costs affect prices because they can’t be changed easily. Take the cost of electricity as an example, if the price went up to $0.10 per kilowatt-hour, it would displace a semi-fixed cost-effectively lowering their profit margin. If a company has to pay more for electricity, it will have to lower its margins as a result or give up production altogether.
Fixed costs are unaffected by changes in prices, providing a base for profits regardless of price changes. Salary costs are the best example of this. In a perfect world, the more employees you hire, the more work you can get done. In short, more employees means more production and higher profits.
Commodity Price Forecast :
With commodity costs largely unaffected by price changes and the lack of easy manipulation to raise prices, the next step is to take a look at the demand side of things. While they can’t increase their product output, companies can influence the number of goods they will produce.
Demand is influenced by four possible factors: Consumer Demand, Advertising Demand, Consumer Expectations and Return on Investment. These four elements are continuously used in any industry to determine how much a company or person consumes based on their needs. If people see products with higher prices, they are less likely to purchase them. This means that companies have to either lower the price of their products or increase their production to meet market demand.
