Unlike brand name products, commodities are goods that have a universal price around the world. Gold, for example, has the same price per ounce in Brazil and Bombay, whereas the price of Refined Sunflower Oil or even Virgin Olive Oil varies depending on the brand and the place in which it is sold.
Commodities are not strictly limited to so-called ‘pure’ elements like gold. A commodity can be refined from a raw element, as oil is refined from petroleum. A commodity can also be mined directly from the Earth, such as a metal, or it can also be an agricultural product, like eggs. In some cases, a commodity can be an abstract financial tool that is universal, such as the fluctuations in interest rates.
Because commodities can take so many different physical forms, the financial market classifies them as a group based on their universal value and how they are traded. However, commodities trading is not limited to simple exchanges. An entire set of complex trading rules, including speculation on so-called “futures,” keeps the market active.
Commodity trading is a broad category where the players range from individual ranchers hedging feed prices right on through to large multi-national trading houses.
Additionally, the expansion of the category of commodities to include more abstract objects like interest rates is a relatively recent addition. Historically, commodities were based on ordinary, tangible goods that could be easily visualized by the layperson.
The expansion into this new territory reflects the growth and ambition of the increasingly globally integrated financial markets. Because there are now more participants in the global markets, the desire for ‘new’ financial territory has encouraged the expansion of the commodities market.