Commodity Research | Innovative Supply and Demand Analysis
Commodity Research
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Analysis
Commodity price potential is very difficult to predict. To estimate the indirect potential of a commodity, WikiWealth uses the average investment potential of individual companies, which use the commodity in production. Some companies benefit when commodity prices increase and other companies have a negative impact from commodity price increases. The difference between the potential of these companies equals WikiWealth's Fundamental Commodity Analysis (quantitative analysis) conclusion.
Commodity Analysis
A top analyst can predict the direction of commodity prices, but no one can predict the fair value of commodity prices, because value depends on supply and demand, which adjusts to changes in price. Commodity prices are circular. When prices are high, supply increases until prices drop. When prices are low, supply decreases until prices increase. When prices decrease, a certain set of companies will benefit, whereas, high prices benefit other companies. WikiWealth gives the difference between these fluctuations as the potential conclusion.
What is a Commodity?
A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereos, on the other hand, have many levels of quality. And, the better a stereo is, the more it will cost.
One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, rice, wheat, gold and silver.
Commoditization occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.
There are two approaches to commodity investing: 1. Indirect Approach: where investors purchase companies that use or produce the commodity. 2. Direct Approach: where investors purchase the actual commodity and hope for the prices to increase.
Benefit from Increasing Prices: Example
Debeers operates diamond mines mainly in Africa. If diamond prices increase, Debeers benefits from higher revenue. However, higher diamond prices hurt companies, which buy diamonds for jewelry for example. Higher prices cause demand to decrease and thus supply of diamonds to increase, because many will go unsold. As supply increases, prices fall until demand increases because of lower prices. An equilibrium price and supply will keep diamond prices steady over the long-term.
Benefit from Increasing Prices: Example
Tiffany & Co purchases diamonds to sell to customers. Higher prices for diamonds are harder to sell to customers, therefore, Tiffany's investment potential will decrease. As customer demand decreases, so will Tiffany's purchases of diamonds from Debeers. Debeers will in turn, mine fewer diamonds, until the supply decreases enough for customers to increase diamond purchases. An equilibrium price and supply will keep diamond prices steady over the long-term.