Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 2

The Speculator and the Commodity Exchanges

HISTORY AND ORIGIN

When civilization began, trading started. Bartering for different commodities has probably been done since time immemorial. Coined money appeared sometime between 800 BCE and 700 BCE. Soon, instead of bartering as a means of business, coined money was used. Eventually trading had to be done on the basis of future delivery, as a merchant would sell out his complete stock but still have customers waiting to buy. The merchant would then take a partial payment and guarantee delivery at a future date. This type of transaction was probably the beginning of the present-day futures contract.

For nearly 300 years, commodity futures contracts were used. Merchants and processors of food would bid for a farmer's crop before or after planting. Both parties were protected and would not have to fear that drastic price changes of the crop during harvest or delivery would alter the normal course of their business. Today's commodity futures markets still offer this protection.

COMMODITY EXCHANGES

What is a commodity exchange? A commodity exchange is an organized market of buyers and sellers of various types of commodities. It is public to the extent that anyone can trade through member firms. It provides a trading place for commodities, regulates the trading practices of the members, gathers and transmits price information, inspects and governs commodities traded on the exchange, supervises warehouses that store the commodity, ...