Commodities, Explained

  • SEP 22, 2017
Commodities, Explained
1.
What are commodities?

Commodity is a good or service that is sold in exchanges.

A commodity has a full or partial substantial fungibility. In other words, any good or service can be interchanged with other same good or service. The units are the same with no regard who produced them. Of course, the quality may differ a bit, but it is almost uniform for all manufacturers. The most representative examples of commodities are precious metals such as gold, silver, and platinum; raw materials such as oil, gas, and coil; food products such as coffee beans, wheat, potato, sugar, and cattle. Often commodities are inputs for the production of other goods.

2.
What features do they have?

The main characteristic is pricing.

This market is totally dependent on supply and demand. Commodities have no producers on the market, all the companies looks the same and do not differ significantly. So, the price is set based on demand and market opportunities. This fact attracts a large number of speculators.

Another feature is standardization. Every commodity must have something that is common for every unit, i.e., weight, density, size and so on. That’s why some products, for example, diamonds are not commodities. The diamonds are unique, they have cut, density, size and color that are different for each gem.

These features are used in money mechanism.

3.
How are commodities connected with money?

In fact, commodities were a mean of payment.

In the past, before market relationships were established in the society, cattle, furs, pearls had been used to pay for goods and services in barter. A bit later, precious metals, in particular silver and gold, replaced other commodities. For a long time money were “obligations” that confirm the ownership of some amount of gold. But it changed in 1971, after Nixon’s laws known as the “Nixon’s shock.” Nowadays, none of the fiat currencies are backed with the gold. It should be noted that almost none currency can fulfill its obligations since the emission of money is much larger than the international reserves. But gold helps countries to keep their economics and money afloat.

4.
Are cryptocurrencies a commodity?

Let’s see.

Most fiat currencies, most cryptocurrencies do not have any backing. Actually, the majority of cryptocurrencies are not tied to any commodity. They have a price only if people believe they have a value. From the very start, cryptocurrencies used a system for fiat money as a basis and changed it a bit considering decentralization and pseudonymity. The value depends on the community that uses a cryptocurrency. If the number of users is quite big, goods can be sold in this currency and it is secure enough and stable, the cryptocurrency will have value even if there’s no equivalent to it in the real world.

5.
Are you saying commodities a bad way to invest?

No, we’re not saying that.

Though commodities have lost their dominant positions in a financial system, they are still a great financial instrument. They are the products that people and industry need all the time. We cannot abandon these things or replace with some others. So, we will use them again and again, and demand will not reduce much. In addition, commodities do not suffer as much as other instruments from the global financial shocks.

Today cryptocurrencies obtain more and more prosecutions that they are just a bubble. More and more ICOs return to the backing for their tokens. Gold is again of particular importance. It is common for average citizens, amount of gold is limited but not too little. Everything new is actually well-forgotten old. Companies such as GoldMint suggest coming back at the origins when money really has a value.