Fundamental analysis on commodities

There are types on fundamental analysis that we used here at 101trading. The first one is fundamental analysis on shares/stocks, the second one is fundamental analysis on forex and in this article we are going to discuss the fundamental analysis on commodities. In this article you will learn what a fundamental analysis on commodities is and you will learn on how to apply it for your trading.

What is a fundamental analysis on commodities?

A fundamental analysis on commodities is a analysis that is focused on the factors that have impact on the supply or demand side of a commodity. With the fundamental analysis on commodities traders and investors can try to predict of what the price of a commodity will be like in the future.

Fundamental analysis on commodities: factors that can influence the demand size

When are you are doing a fundamental analysis on commodities one of the first thing that you should be checking is the demand side of that commodity. For many commodities the general rule is that when the economy of countries are growing the demand side for commodities will grow as well. And because of that the demand side will grow faster then the supply side of the commodity. In this case the supply can not meet up with the demand so the producer will sell its commodity to the highest bidder. So in general when the demand keeps growing and the supply side stay still, the prices for commodities will increase.

What are the factors that can influence the demand size of a commodity?

There are many factors that can influence the demand side of commodities. In this article we are going to discuss the three major factors that can have influences on the demand for commodities.

Price

Price is one of the factors that has influence on the demand side of a commodity. The general thumb rule is that when the prizes of a commodity decreases the demand will increase. Its simple economics. For example if the gas price is £ 1,- per litre, you would use gas more then if the gas price was £3,- per litre. The cheaper it is to more you will use.

Economic growth

Economic growth has a impact on the demand side of the commodity as well. If they economy is growing as expected or better then expected the price of commodities will grow in value. However if the economy is growing slower then expected the price of commodities will go down. As you may guess if there is no economy growth in the present or in the future the value of a commodities will go down.

Politicians and central banks

Politicians and central banks are the ones that creates policies that should support the economy of their country. Sometimes it works well and sometimes it doesn’t. Although it may take a while before the policies get implemented the markets usually reacts first. Causing either a increase or decrease in demand.

What are the factors that can influence the supply side of a commodity?

Price

While a decrease in price creates a increase in the demand. The decrease in price of commodities has a other effect on supply. If the prices of commodities decrease  the supply will decrease as well under normal circumstances. The reason for that is that it doesn’t makes any sense for a producer to produce a lot of commodities for a low price. When the prices of commodities increases the supply will increase as well under normal circumstances. A high price is attractive for a producer to produce a lot of commodities as he can earn more money.

Economic growth

A increase in economic growth leads to a higher demand which results in a higher price for commodities. And as you know by now a high price for commodities will increase the supply of commodities. When the economic growth is below expectations the demand will decrease which leads to a lower price of commodities. As you know a lower price in commodities equals a smaller supply of commodities.

Politicians and central banks

Politicians and central banks are the ones that creates policies that should support the economy of their country. Sometimes it works well and sometimes it doesn’t. Although it may take a while before the policies get implemented the producers usually watch from the sideline what effects it has on the prices and prepare measurements to take when it is needed. Causing either a increase or decrease in supply.

How to make money with fundamental analysis on commodities?

The first thing in making money with fundamental analysis on commodities is to understand the factors that have influences on the demand and supply of commodities. The second thing on the fundamental analysis on commodities is to remember these two formula’s:

1. When the demand is bigger then the supply = a increase in prices of commodities

2. When the supply is bigger then the demand = a increase in prices of commodities

The third thing that you need know is that when the prices of commodities are too low , the producers will shrink the supply so that the demand is bigger then supply again which will lead into a increase of prices for commodities. When you hear that the producers are announcing that they will shrink the supply then you will know that a bullish trend is coming for the commodities. As a trader and investor you can make money by going long.

The opposite will happen when the producers are announcing that they are going to increase the supply. The prices of commodities in this case will go down. You as a trader and investor can make a huge profit by going short.

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