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Economics

What is a commodity?

A commodity is a basic good used in commerce. Commodities are generally raw materials or primary agricultural products that can be bought and sold.
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This article was originally published by Value The Markets

A commodity is a basic good used in commerce and one that is interchangeable with other goods of the same type. Commodities are generally raw materials or primary agricultural products that can be bought and sold. Commodities are traded on an exchange and must meet specified minimum standards to qualify for the exchange.

Typical examples of commodities include:

  • Precious metals such as gold, silver and copper
  • Wheat and grains
  • Beef
  • Oil
  • Natural gasses

How a commodity works

The purchase and sale of commodities are generally carried out through futures contracts on exchanges that have standards in place for the minimum quality and quantity of the type of commodity being traded.


The Chicago Board of Trade states that one wheat contract is for 5000 bushels and also determines which grades of wheat can be used as part of the trade. Having these standards in place helps ensure that all commodities are of the same quality across producers.


Essentially, commodity prices are determined by supply and demand. Commodity prices usually increase with inflation, making them a popular choice with investors when inflation is expected to rise.

As the demand for goods and services increases, the price of the commodities used to produce these goods and services also increases. This strategy is often classed as a hedge for inflation as an investor in commodities would be hedging against the fall in buying power of the currency.

Equally, when the demand for particular goods and services falls, so can the price of the commodities used to make them.

Types of commodity traders

There are two main types of commodity traders:

Buyers and producers of commodities:

These types of traders use commodity futures contracts for hedging purposes and the way in which they were originally intended to be used. For example, a wheat farmer plants a crop, he then places a hedge against the risk of losing money if the price of wheat decreases before the crop is harvested. This means the farmer can sell wheat futures contracts when the crop is planted and secure a predetermined price for the wheat when it is harvested.

Commodities speculators:

These are traders that trade in the markets with the purpose of capitalizing on the volatile price movements. They have no intention of making or taking delivery of the commodity when the futures contract ends. Trading in this way is often seen as a good way for traders to diversify their investment portfolios and can provide good short-term gains.

Advantages of commodity trading

There are many advantages of commodity trading, such as:

Protection against inflation

Investing in commodities is a good way for investors to protect against increases in inflation. As the rising prices of final goods are inflated so are the prices of the raw materials or commodities that are used to make them.

Hedge against political events

Investors can use commodities to hedge against geopolitical tensions or events such as war, riots or conflict which can disrupt the supply chain and cause a dip in supply. The low supply coupled with a high demand can make the price of commodities surge.

High leverage

Trading commodities can provide a high amount of leverage, investors may have the options to control a large position on just a 5-10% payment of the contract value as an upfront margin.

Disadvantages of commodity trading

As with all types of investing commodity trading also has its disadvantages, including:

Higher losses through leverage

While leverage can be great when making gains, it can quickly escalate into big losses when the market is moving against you. There is a big risk when using leverage and while gains can be outstanding, losses could dissipate your entire investment.

Markets can be volatile

As the drivers of commodities is supply and demand, they are often considered one of the most volatile assets on the market. Effects from inflation and geopolitical events can also trigger huge spikes or loses.

Do not generate income

Investors looking to create an additional income stream from their portfolio may not want to include commodities, as they do not pay dividends or interest. The return on commodities is based solely on the appreciation of the asset price.

The post What is a commodity? appeared first on Value the Markets.

Precious Metals

Is Silver a good buy in October 2021?

Silver extended its correction from the recent highs above $24, and we could see even lower prices in the weeks ahead if the U.S. dollar remains strong….

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Silver extended its correction from the recent highs above $24, and we could see even lower prices in the weeks ahead if the U.S. dollar remains strong. The demand for the dollar continues to grow, although it remained below its weekly high of 0.86 compared to the euro.

Fundamental analysis: Fed Chair Jerome Powell said that interest rates could rise quicker than expected

Since the beginning of September, the silver price has weakened more than 5% and reached the price levels that we had seen in November 2020. The U.S. central bank reported on Wednesday it could begin reducing its monthly bond purchases by as soon as November 2021, which positively influenced the U.S. dollar, and the most significant force behind the silver price slide is the appreciation of the U.S. dollar.

“The U.S. central bank is preparing the ground to possibly begin dialing back some of the extraordinary support it has given the economy during the pandemic. The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff,” Fed Chair Jerome Powell told reporters on Wednesday.

The U.S. Federal Reserve switched to a more hawkish tone, and Fed Chair Jerome Powell said that interest rates could rise quicker than expected by next year. Jerome Powell also said that Fed achieved its goal on inflation, while more than half of Fed members believe that the economy reached the employment goal.

The global business activity is recovering, the U.S. unemployment rate fell to 5.2% in August, and the rapid price increases are also a reason to begin raising rates. The prospect of interest rate hikes positively influences the U.S. dollar, and those whose interest is to invest in precious metals like Silver should have the U.S. dollar on their “watch list.”

Technical analysis: $20 represents a strong support level

Those whose interest is to invest in commodities like Silver should consider that the risk of further decline is still not over.

Data source: tradingview.com

The important support level currently stands at $20, and if the price falls below this level, it would be a firm “sell” signal. The next price target could be around $18 or even below.

On the other side, if the price jumps above $25, it would be a signal to trade Silver, and we have the open way to $27.

Summary

Silver price remains under pressure after the U.S. central bank reported that it could begin reducing its monthly bond purchases by as soon as November. The most important driving force behind the price slide is the appreciation of the U.S. dollar, and investors will continue to pay attention to the U.S. Federal Reserve comments.

The post Is Silver a good buy in October 2021? appeared first on Invezz.

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Economics

Market-Based Indicators of Inflation, Growth and Risk

Medium term inflation expectations are muted, growth expectations are recovering slightly, and perceived risk seems contained. Figure 1: Top panel: Five…

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Medium term inflation expectations are muted, growth expectations are recovering slightly, and perceived risk seems contained.

Figure 1: Top panel: Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), all in %. Middle panel: 10 year-3 month Treasury spread (blue), 10 year-2 year Treasury spread (red), both in %. Bottom panel: VIX (teal, left scale), Economic Policy Uncertainty, 7 day centered moving average (salmon, right scale).  NBER defined recession dates shaded gray (from beginning of month after peak month to end of trough month). Source: FRB via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) , FRED, policyuncertainty.com, NBER and author’s calculations.

The top panel of Figure 1 shows that the standard breakeven for 5 year horizon has stabilized; the adjusted for inflation risk premium/liquidity premium indicator was also stable at end-August, indicating 1.18% inflation on average.

Expectations as proxied by term spreads suggest that growth trends bottomed out in mid-July, after peaking in mid-March. They’re now rising slightly over the last two weeks.

Finally, a market based measure of risk (the VIX) has is relatively quiescent. So too is the newspaper account based Baker-Bloom-Davis measure of policy uncertainty. This is true despite the rising political uncertainty regarding passage of the reconciliation and infrastructure bills, and more importantly, the raising of the debt ceiling. Credit spreads have also failed (so far) to evidence much reaction:

Notes: The ICE BofA High Yield Option-Adjusted Spreads (OASs) are the calculated spreads between a computed OAS index of investment grade bonds BB and below, and a spot Treasury curve.  Source: FRED, accessed 9/25/2021.

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Economics

Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Authored by Mike Shedlock via MishTalk.com,

Central bank digital currencies…

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Welcome To The Central Bank Hotel, Once Inside You Can Never Leave

Authored by Mike Shedlock via MishTalk.com,

Central bank digital currencies are on the way. The German Central Bank just embraced a digital euro. Let's discuss the risks...

Fintech and Global Payments

 Jens Weidmann, president of the Bundesbank, Germany's central bank gave the opening speech at the digital conference “Fintech and the global payments landscape – exploring new horizons

Exploring a Digital Euro

The title of Weidmann speech was Exploring a Digital Euro

Emphasis mine with my thoughts in braces [ ]

Paper money, for instance, was first introduced in China about a thousand years ago. This innovation eventually transformed the payments system. Today, digitalisation is on the cusp of overhauling payments.

Central banks have to work out how to respond to this challenge. One possibility is the issuing of central bank digital currencies (CBDCs). According to a survey by the Bank for International Settlements (BIS), the share of central banks conducting work on CBDC for general or wholesale use rose to 86% last year. Many of them have made significant progress.

Two months ago, the Eurosystem launched a project to investigate key questions regarding the design of a CBDC for the euro area. The aim of the investigation is to prepare us for the potential launch of a digital euro. Experiments have already shown that, in principle, a digital euro is feasible using existing technologies.

As my ECB colleague Fabio Panetta has stressed, a digital euro would have “no liquidity risk, no credit risk, no market risk,” in this way resembling cash.

[No Risk? Really] 

The protection of privacy would thus be a key priority in terms of maintaining people’s trust. European data protection rules would have to be complied with. Nevertheless, a digital euro would not be as anonymous as cash. In order to prevent illicit activities such as money laundering or terrorist financing, legitimate authorities would have to be able to trace transactions in individual, justified cases.

[Every Case]

But designing CBDC involves curbing its risks. In order to prevent excessive withdrawals of bank deposits, it has been suggested that a cap be placed on the amount of digital euro that each individual can hold. Or that digital euro holdings in excess of a certain limit could be rendered unattractive by applying a penalty interest rate.

[No Risk? I thought you said there was no risk.]

If a digital euro were accessible for non-residents, this could impact on capital flows and euro exchange rates. What this calls for is international and multilateral collaboration.

[Wait a second, is this another risk?]

Self-reinforcing loops and “lock-in” effects may tie users to one platform and exclude competitors. Some observers have been reminded of “Hotel California”, the famous song by the American rock band “The Eagles”: it’s such a lovely place, with plenty of room; but once inside you can never leave.

[Hotel Central Bank: Once inside you can never leave.]

The Eurosystem has no commercial interest in user data or behaviour. A digital euro could therefore help to safeguard what has always been the essence of money: trust.

[Ah yes, trust that interest rates won't go even more negative, money won't expire, and withdrawals won't be capped].

Central banks need to be at the cutting edge of technology. Otherwise, they cannot provide the backbone of payment systems and offer safe and trusted money for the digital age.

This has prompted all major central banks to start exploring issuance of CBDC. However, our success as a money creator will depend not so much on speed, but on the trust of those who are supposed to use the money.

Europe Moving Ahead

It appears Europe is moving ahead faster than the Fed. 

The risks are obvious.

  • Expiring Money

  • Increasingly Negative Interest Rates

  • Withdrawals Capped

  • Withdrawals Taxed 

  • Gifts Taxed

And once inside you can never leave. 

Livin' it up at the Hotel Fedifornia has a nice ring to it. ECBifornia isn't as catchy. 

* * *

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Tyler Durden Sat, 09/25/2021 - 13:00
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