Commodities investing
The concept of commodity can be aptly demonstrated by giving the example of a table. Table is a commodity because; it can be traded as a product. It is a product for human use, and has an economic value in terms of social utility. It is a piece of furniture created by human labor to be used for trade. The same table if sculpted by an artist as a hobby, for a gift to a friend wont be considered a commodity. Similarly it is not a commodity if used to make a fire. The table must have a utility- value in terms of economic validity to be labeled a commodity.
In the world of business, a commodity is a specific good, service or product that can be traded on the merit of its price. Its other characteristics like features and quality are not considered for commercial purpose.
Business commodities can be best illustrated with a list of examples from practical life:-
1) Electricity: The use of electric power is in its value as a unit of energy consumption. Very few users are actually concerned about the technical characteristic of frequency deviation and voltage, the quality of light or phase imbalances.
2) Rice, Wheat, Metals, Chemicals etc
3) Music: Music is an intellectual property and can be bought and sold digitally.
4) Technical know- how
5) Established brand names
6) Websites
7) Labour which can be bought and sold
8) Tradable currency
Historical perspective
Commodity investment was ones viewed as a fringe activity, with very few traders able to get exposure. Originally, commodities were goods of economic value which were mass produced; with uniform quality specifications. There was an equality-quotient in the things offered by varied producers.
Mechanism
The value of the commodity is determined by the contract and concealed standard, irrespective of its innate qualities. Commodity trading has re-emerged with a renewed vigor in recent years because of the rise in volumes of universal commodities like base metals, oil, wheat etc.
Rice is an obvious example of a soft commodity. A rice pool is formed from the yield of different farms for the purpose of trading. A criterion is predetermined for the accepted standard in quality to eliminate differences in pricing. Different and various standards are set for the creation of these pools. There might be one pool for rice which is processed through genetic modification and another for wheat which is not modified. If a crop does not measure up to the buyers estimation of the risk quotient and utility purpose, it loses its value in terms of price. This can also lead to the division of the market in more pools. This is a very important feature for agricultural policy makers.
There is dynamism and efficiency in the market of commodity trading. This is achieved by division of pools according to the market demands. These results in efficient and quick response of the commodities market to dictates of demand and supply. The right price and quantity for business is established immediately. Changes are taken in their stride and the whole mechanism works like a wonderful matrix.
Commodity exchanges
Some of the leading commodity exchanges are:-
New York Mercantile Exchange, Euro next. Life, Chicago Board of Trade and London Metal Exchange.
Marxist percpective
Karl Marx was the father of Marxism. His definition of commodity forms a landmark in the field of political economy. He defined commodity as any service or good placed in the market for sale. Abstractions like human labour, natural resources, art work and labour power were also treated as commodity, because they were tradable from the demand and supply point of view and commanded a price in the market. These were not necessarily goods produced for a specific market, neither ware they non-reproducible things.
In economic parlance the Marxist commodity-analysis established a method of analyzing commodity by arriving at its economic value, through the labour-value theory. There was an intense debate in this regard between renowned economists like David Ricardo, Jagetzow and Adam Smith. Traditional economists do not equate price and value. Any theory equating the underlying value with the market price was just that for economists from all fields.
Commodity characterisitics
Value - A commodity has value in terms of utility, which is popularly known as use-value. The use-value of a commodity is determined by its basic innate characteristics. The value of a good or service is determined by its ability to fulfill a human need, whether abstract or material. This interpretation boils down to gauging commodity as a means of social value with its usability extending beyond the producer, to the larger masses.
Price - The overt monetary manifestation of a good or a service in terms of its exchange value determines the price of a commodity. Besides this the other factor establishing price can be the relation between commodities, without the use of money as measure.
Labour Value - This theory helps arrive at the value of a commodity by regulating its product estimation in an open market by the time and labour required for its production.
The relativities of price mechanisms are finally established by these different laws and values.
Commodity trading in modern avatar
Investments in commodities are considered very risky, and mirrors the reckless image of the financial world. But technology and dynamism has reinvented the world of commoditiees, through a small segment of highly professionalized and excellent quality; index-based funds which adhere to conservative and safe norms in investing. These are relatively orthodox to be more precise.
Extreme fluctuations in short and long periods are commonly felt in the world of commodity index funds. The ingredienting processes and managing techniques of commodity index funds are constantly struggling to minimize these fluctuations, and offer ways of expert risk management in different ways. The common investors can take their positions in the commodity market directly via commodity brokers by opening accounts. They eliminate the wildness factor in commodity investment to a large exchange by various strategies of functioning. Commodity index funds are monitored and managed through computer devices. Their functioning is largely based on monthly closing prices of a portfolio which is termed fixed-weight of the coming forwards and futures contract months, on the typical commodity market internationally.
The classification and value of the portfolio of the particular set of commodity in a commodity index fund is mostly evaluated on an annual basis. Big industry changes or a major change in the demand and usage of a commodity also determine the evaluation time needs of these funds. Planned-selection, study and management strategies, makes provision for minimizing risk for the investors in these funds.
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