What commodities and metals are

A market in a physical unit 

A commodity is a raw material or primary agricultural product standardised until one unit substitutes for another. That standardisation is the precondition for a market, not a detail of one. Two parties who have never met can agree a price for a cargo neither has seen, because a specification states exactly what is priced: grade or purity, the unit of measure, the delivery point and the delivery month. Change a term and the price changes with it, which is why crude from one region and crude from another are separate instruments rather than one price for oil.

It also defines what a commodity price is not. Nothing about a mining company's management, debts or plans is in the price of the metal it takes out of the ground, because the metal is identical whoever takes it out. A commodity price prices a physical unit, and its news flow is about how that unit is produced, stored, moved and consumed.

Hard, soft, and where the metals sit 

The conventional division is drawn on how the material comes into existence. Hard commodities are extracted: crude oil, natural gas, copper, aluminium, gold, silver. Soft commodities are grown: coffee, cocoa, sugar, wheat, corn. It looks like taxonomy for its own sake and is not, because it predicts what moves the price.

• Extracted materials respond to drilling and mining decisions, refining capacity, transport routes and the cost of the energy used to move them. Supply is produced continuously and stores well, so a shortfall can be met from storage rather than from the ground.
• Grown materials respond to weather, to planting decisions taken a season in advance, to disease and to harvest timing. Supply arrives in an annual cycle, much of it perishes, and a season that has gone wrong cannot be corrected until the next. Softs are where one weather event can dominate a price for months.

Precious metals sit inside the hard group and then behave partly outside it. Gold, silver, platinum and palladium are mined, so they carry the supply characteristics of anything extracted. Gold breaks the pattern because it is barely consumed: it is held, by central banks as a reserve asset and by private holders as a store of value, so most of the gold ever mined is still above ground and annual output is small against that standing stock. Practitioners describe gold as behaving partly like a metal and partly like a currency, and disagree about which dominates. Platinum and palladium sit between the two, precious by rarity yet consumed industrially in vehicle emissions equipment, which is why they can track car production rather than gold.

What moves a commodity price 

A commodity price is a negotiation between supply that is slow to change and demand that changes faster. An oil field takes years to bring into production and cannot be switched on for a fortnight because prices rose, while consumption can fall away in a month. Three mechanisms carry most of the news.

1. Production decisions. Output is set by producers, and in energy much of it is coordinated: the members of the Organization of the Petroleum Exporting Countries, with the wider group that meets alongside it, agree production targets and announce changes on a published calendar. The price responds to the part of an announcement that differs from what participants had assumed, not to the part that confirms it.
2. Inventory. Storage sits between production and consumption and absorbs the mismatch, so its level is the clearest reading of whether the two are in balance. Inventory reports publish it on a fixed schedule: in the United States the Energy Information Administration issues a weekly petroleum status report on crude and refined product stocks. A build says supply has run ahead of consumption; a draw says the reverse.
3. Physical constraint. Weather damages a crop, a pipeline is shut, a strait becomes hard to transit, a refinery goes offline, a mine floods. These are shocks to the ability to deliver the material rather than to the appetite for it, and they move near-term prices more than distant ones.

Naming the mechanisms is not the same as anticipating them. Supply and demand information arrives continuously, and whatever is already known about it already sits in the last traded price. The three are a vocabulary for what a headline is claiming, not a method for working out what a price does next.

How a commodity CFD is quoted 

The deep markets in most commodities are markets in futures: standardised contracts for delivery in a stated month, traded on an exchange. A commodity CFD is usually quoted instead as a spot or cash instrument, referencing a price for immediate delivery with no expiry of its own. Where the liquid market is in dated futures, as in energy, that spot quote is derived from the nearest contracts.

Contract size is where commodities depart most visibly from the currency pairs in the previous lesson. In foreign exchange one convention covers the asset class: a standard lot is a fixed number of units of the base currency, the same number for every pair, so lot counts are comparable between instruments. Commodities have no single convention, because the unit is physical and every material has its own. Gold is quoted per troy ounce, crude oil per barrel, copper per pound, grains per bushel or tonne, and each contract covers a set quantity of that unit. The consequence is exact: one lot is a different exposure in two commodity markets, and the specification rather than the lot count states what that exposure is.

Profit and loss are then calculated on the whole of that face value, and working one movement through in both directions is what makes the specification visible.

Why gold is quoted against the US dollar 

Gold trades as XAU against USD, and the symbol is not decoration. XAU is the ISO currency code for one troy ounce of gold, so the instrument is built like the currency pairs in the previous lesson: the base is the ounce, the quote currency is the dollar, and the number is how many dollars one ounce costs.

That has a direct consequence. A quoted gold price changes for two independent reasons and does not distinguish between them. Something can happen to gold: mine output, central bank buying or selling, demand for a store of value. Or something can happen to the dollar, because a dollar that weakens against currencies generally buys less of the same unchanged ounce. A gold chart is a chart of gold and a chart of the dollar superimposed, which is why the metal is also quoted against other currencies: gold against the euro holds the metal constant and changes the denominator.

The convention is not unique to gold. Crude oil, most industrial metals and most soft commodities are quoted in dollars too, a legacy of where the deep standardised markets developed and of the currency cargoes have been invoiced in. That matters in the Gulf, where several currencies, the United Arab Emirates dirham and the Saudi riyal among them, are held at a fixed rate against the dollar by their central banks. A dollar-denominated commodity price therefore passes through with far less currency noise than it would to a holder of a floating currency. The peg removes one of the two sources of movement above, and nothing about the commodity itself.

Where the per-instrument detail lives 

Everything above is common to the asset class. What a position actually is comes from the per-instrument detail: the reference it is priced from, what its contract covers, and what hours it quotes. YAL lists 25+ commodities and metals on MetaTrader 5, and the per-instrument detail sits on the commodities and metals market pages, with the schedule on the answer on trading hours.