Getting Started in Commodities

Chapter 5

Fundamental Analysis of the Commodities Markets

The primary goal of a commodity trader is to accurately forecast price movements. Forecasts can be made using either fundamental or technical analysis and, in some cases, a combination of the two. Technical analysis relies on market data (i.e., price patterns and volume) to predict trends. In contrast, fundamental analysis focuses on the market environment—in particular, how supply and demand affect a particular commodity—to sense bullish or bearish trends. In a market economy, the interaction of supply and demand determines a commodity's price.

technical analysis

the study of the price action of a security based on the theory that market prices display repetitive patterns that can be tracked and used to forecast future price movement. Technical analysis evaluates price movement by analyzing statistics generated by market activity—such as past prices and volume—to study market performance.

Supply

Supply represents the sum total of current commodity production together with stockpiles carried over from previous production cycles. The supply of wheat, for example, consists of the current crop, plus stores in grain elevators from previous harvests. From the perspective of wheat farmers, supply represents the quantities they're willing to sell over a range of prices at any given time. All things being equal, farmers are likely ...