Glossary
Commodity
A basic, interchangeable raw good such as oil, gold, wheat or copper, traded in bulk on spot and futures markets.
A commodity is a raw good that is interchangeable with other units of the same grade: a barrel of West Texas Intermediate crude is worth the same as any other barrel of WTI delivered to the same place, and one troy ounce of 99.5% pure gold is as good as the next. That sameness, called fungibility, is what lets commodities trade in bulk on standardized contracts instead of being haggled over lot by lot.
How commodities trade
Commodities change hands in two linked markets. The spot market is for delivery now, at the spot price. The futures market is for delivery on a future date at a price agreed today, through exchanges such as CME Group's NYMEX and COMEX and the Intercontinental Exchange. Most futures traders never take delivery; they close or roll positions before expiry.
Traders usually group commodities into four families:
- Energy: crude oil, natural gas, gasoline, heating oil.
- Metals: precious (gold, silver, platinum) and industrial (copper, aluminum).
- Agriculture ("softs" and grains): wheat, corn, soybeans, coffee, sugar, cotton.
- Livestock: live cattle, lean hogs.
Why investors watch them
Commodity prices feed straight into costs for airlines, food makers and utilities, and into consumer Inflation. They also tend to move differently from stocks and bonds over long stretches, which is why some portfolios hold a small slice of them. Ordinary investors usually get exposure through commodity ETFs or producer stocks rather than futures, and those routes have their own quirks: futures-based funds can lag the spot price badly when the curve is in Contango.