Fundamental Analysis in Commodity Markets: Understand Commodity Market Analysis

Analysing the commodity markets is a lot like looking at visible signs like dark clouds and predicting that it is about to rain. Just like in the scenario where it is about to rain, you respond to these climatic changes and take appropriate action; the same needs to be done when investing in commodities. For example, if your fundamental analysis reveals that the price of gold (a commodity) is about to go up, you may respond by purchasing more gold assets. But what exactly is fundamental analysis in terms of the commodity markets?

Understanding Commodity Market Analysis

You can analyse the commodity markets by using either technical or fundamental analysis methods. Technical analysis is when you review the historical changes in the prices of commodities like gold, silver, oil etc. You may do this using data available in tabular or graphical form.

Whereas fundamental analysis in commodity markets is when you evaluate external factors influencing the prices of these commodities. There are several external factors such as geopolitics, economic indicators like inflation, employment etc., government policies, industrial demand, and currency fluctuations.

External Factors in Fundamental Analysis

Fundamental commodity market analysis involves evaluating certain external factors that influence the prices of the said commodities. This works because factors like geopolitical events, economic indicators, government policies, industry demands, and currency fluctuations often affect the supply and demand of oil, gold, silver, etc. This, in turn, influences their prices because when supply is high and demand is low, prices are low. Whereas when supply is low and demand is high, prices are also high.

1. Geopolitical Factors

Geopolitical events like wars, trade tensions, and supply chain interruptions can often affect the supply and demand of commodities like oil and precious metals, thus influencing commodity prices.

Seasoned commodity traders regularly track these geopolitical factors as part of their fundamental commodity market analysis. This gives them reasonably accurate insights as to when the prices of such commodities may rise or fall.

2. Economic Indicators

Economic indicators such as interest rates, inflation, gross domestic product (GDP), and employment have a significant impact on commodity prices. When you conduct a commodity fundamental analysis, you need to factor in changes in all of these indicators.

For example, if the interest rates go up, the country’s currency may become stronger, which could also lead to an increase in gold prices within that country. However, if at the same time, inflation also goes up, then demand would reduce, leading to commodity prices reaching a status quo.

3. Government Policies

On the other hand, a fundamental analysis of commodities needs to account for changes in government policies and regulations. These may include government subsidies, tariffs, and other regulations that could effectively impact the supply and demand of the concerned commodity (whether it be oil or precious metals).

For example, sudden changes in the gold purity standards in a country could lead to panic selling, resulting in a rapid decline in gold prices. As a retail investor investing in the commodity market, you could respond to these changes by buying up more gold bonds for when the prices are back up.

4. Industrial Demand

When doing a commodity market analysis, you should also consider the industrial demand. Besides the demand of direct consumers, changes in industrial demands of precious metals could also impact commodity prices.

For example, if a new manufacturing facility for microchips has opened up, they would need a supply of gold for the electrical contacts on these chips. This could increase the industrial demand for gold, increasing gold commodity prices.

5. Currency Fluctuations

Ujjwal also emphasises that currency fluctuations form a major part of commodity market analysis. One easy way to track this is through the HDFC Sky app that enables trading in currencies. You can quickly access the currency trading page of HDFC Sky and view the trend in currency rates.

For example, if the price of the Indian Rupee (INR) goes up, there is a high chance that the price of oil (which is mostly imported) will go down.

Conclusion

So, when you indulge in commodity fundamental analysis, you need to consider all of the above-mentioned factors. Commodity market analysis is a powerful tool that experienced investors can use. If you wish to exponentially grow your wealth, then investing in the commodity market is a good way to do so. However, make sure you do the due diligence first using fundamental analysis.