Last Updated on September 19, 2018
It is said that unless you can explain a phenomenon in laymen terms, you do not understand it at all. If it is meant to cater to a specific need then it is a commodity. That is the shortest and perhaps the most elegant explanation of what a commodity is.
In even more basic terms, everything you see around you is a commodity. Items that can be bought, that can be sold, that have a price, that can be made using raw materials…all of these are commodities. In other words, nothing spectacularly special, right? Wrong.
It might come as a surprise but the entire state of the global financial market relies heavily on the speculation on how the commodities hold up. There are live commodity prices that flash constantly around the stock markets around the world where corporations constantly invest in them. And it’s not a trend that has occurred recently. Commodities have always been the cornerstone of the stock markets around the world for decades.
But, what exactly makes them so interesting? The answer to that lies in understand the financial basis for the importance of these commodities across the world. There are certain reasons why these factors influence the global market. These reasons are listed and elaborated below:
The Demographic Trends
No matter which demographic scale you use to analyze the position of commodities at any period in time, you’ll find that the capital gains factor has always played an important role. There’s a well-known financial phenomenon that boomers were the risk takers.
It was their risk taking maneuvers that spawned a new age in the financial sense. The interest rates were lower, so it further encouraged investors to invest in these commodities. It doesn’t matter how the financial state of the world is, everyone will still need to buy these items. This is the one sector where you don’t need to be worried about the supply side of the equation.
Though the various spending and investment habits may have changed since those days, the Gen X, Gen Y and now even the millennial generation has continued to invest in commodities. China’s role in that market promises to further embolden the global investments in commodities.
As the demand for these commodities rise, the supply side will inevitably need to raise its production…for it to do so, it’ll need capital. And that capital will be raised through further investments.
The Inflation Factor
This is another basic economic phenomenon that promises to stay the same for the foreseeable future. If you had $1 in 1988, the value of that dollar has probably decreased in the 3 decades since then. But, what if you invested that $1 in commodities in 1988? Your $1 investment would be worth a lot more. The reason for that is something called “inflation”.
As inflation rises, the capital appreciation of the “assets”, in this case, the commodities also rise in value. So, if you have money invested in these commodities then you can expect a hefty increase in your returns. Purely from a “financial gain” point of view, inflation eats away the value of money…while adding value to your investments.
Production of Commodities
This is where the foremost rule of economics comes into play i.e. the demand-supply equation. Not only has the demand of commodities skyrocketed around the world, the supply of the raw material necessary for production of these commodities has increased as well.
This means that commodities represent a stable and risk way investment opportunity. Individuals as well as corporations are increasing pouring capital in them.