Fundamental Analysis of Commodities

Fundamental Analysis of Commodities

Demand > Supply = Higher Prices

Supply > Demand = Lower Prices

A means of analyzing commodities and trying to predict where the prices of commodities should be trading and what they will do in the future is Fundamental analysis. The main basis for fundamental analysis is supply and demand.

I like to look at commodities that are trading at multi-year highs or lows. Eventually, the picture will change and that will lead to a good trading opportunity.  Supply and demand is a very simple equation, but it gets more complicated when you try to forecast prices in the future. Remember that commodities trade in cycles. Some times supplies will be tight and prices will be high. Other times, we just have too much of a commodity and prices fall accordingly.

Longer-term trends in commodities are easier to spot with fundamental analysis, but I prefer to use technical analysis to capture shorter-term movements in commodities prices. Most professional commodity traders like to know what the big picture is with commodities using fundamental analysis and then they use technical analysis to time their entries and exits.