How the commodities and metals market works

What the market is 

A commodity is a good treated as interchangeable with any other unit of the same specification. A troy ounce of refined gold of a stated fineness stands in for any other troy ounce of that fineness; a barrel of crude meeting a stated density and sulphur content stands in for any other barrel meeting it. That interchangeability is what makes the market possible: a contract can be written on a specification rather than a consignment, so buyers and sellers who never meet can agree a price for something neither has inspected.

The consequence is that a commodity price is not a valuation. A share price rests on a claim to future earnings and a bond price on a stream of promised payments, so both can be argued about in terms of what the issuer will earn or pay. A commodity promises nothing. It sits in a warehouse, a tank or a silo, costs money to keep there, and is worth what the marginal buyer will pay for delivery at a stated place on a stated date. Everything that moves the price moves it through one of three quantities: production, consumption, and what is already held in storage.

Two prices exist for the same good at once, and confusing them is the standing error here: the spot price is for immediate delivery, a futures price is agreed today for a stated month ahead, and the gap between them is not a forecast but largely the arithmetic of storing, insuring and financing the good until that date.

The four families 

The class splits into four groups, and the split is not cosmetic: each family has its own production geography, storage cost and set of buyers, so one headline event moves them differently.

• Precious metals. Gold, silver, platinum and palladium, quoted per troy ounce against the US dollar as XAU/USD, XAG/USD, XPT/USD and XPD/USD. Storage is cheap relative to value, so above ground stock rather than annual mine output is what the market clears against.
• Energy. Crude oil under its two reference grades, Crude Oil Brent and Crude Oil WTI, alongside natural gas and the refined products made from crude. Storage is expensive and physically capped, so a barrel that cannot be stored has to be sold at whatever it will fetch.
• Industrial metals. Copper, aluminium, zinc and nickel, bought by manufacturers and construction rather than by investors, and tied to industrial activity rather than to financial conditions.
• Agriculture. Grains such as wheat, corn, soybean and oats, and the softs, meaning coffee, cocoa, sugar, cotton and orange juice. Supply arrives in harvests rather than continuously, so the calendar and the weather in a few growing regions dominate the price.

Who trades it 

The participants divide into two populations with opposite motives, and the market functions only because both are present. Commercial participants hold or need the physical good: a miner has metal it has not yet sold, an airline has fuel it will need next quarter. Each carries a price exposure created by their business rather than chosen, and each can transfer it by taking the opposite position in a contract. That transfer is hedging, and it is the market's original purpose.

Financial participants take the other side. They hold no physical position and seek no delivery, and they are present because a hedger who wants to sell forward needs somebody willing to buy forward. That presence is what lets a producer fix a price at all, and it is also what makes prices move in ways with no immediate physical cause. Merchants and trading houses sit between the two, arbitraging one location against another so a curve shape becomes a flow of goods, and central banks are a distinctive holder of gold on a horizon measured in decades. Regulators publish weekly reports classifying open positions as commercial or non commercial, which is how the balance is observed rather than guessed at.

What sets the price 

Supply in most of these markets is inelastic over the horizons trading happens on: a mine takes years to permit and build, a field takes years to develop, a crop is planted once a season. Demand is inelastic in the short run too, because a smelter that needs copper cannot run without it. Two inelastic curves meeting is the structural reason commodity prices move further than the change in physical quantities would suggest, since when neither side can adjust quantity the whole adjustment happens in price.

Inventory is the shock absorber between them, which is why inventory data is watched more closely than production data. Stocks in exchange warehouses, commercial tanks and government reserves are published on a regular schedule, and their level relative to consumption is the standard measure of the market's slack. A market with ample cover absorbs a disruption in inventory; a market with thin cover absorbs it in price.

Because almost every reference contract is quoted in US dollars, the dollar is itself an input into the price a non dollar buyer faces: a stronger dollar raises the cost of the same good measured in another currency. Interest rates enter through a second channel, the cost of financing inventory, which is one component of the spread between spot and forward prices.

Why the futures curve matters 

Most commodity trading happens in futures rather than in the physical market, so the reference price is a series of prices, one per delivery month, forming a curve. When later months are dearer the curve is in contango, a shape normally explained by the cost of storing, insuring and financing the good until that date. When nearer months are dearer it is in backwardation, the shape a market takes when the good is scarce enough now that buyers pay a premium to have it immediately.

The shape has a practical consequence for any position held across an expiry. A futures contract has a fixed last trading day, so an exposure meant to persist beyond it is moved into the next month, whose price is not the price of the expiring one. That transfer is the roll, and its cost or credit is set entirely by the curve rather than by any view about direction.

When it trades 

The trading calendar is inherited from the underlying venue rather than chosen by a broker, so it differs by commodity and is published per instrument in its contract specifications. Precious metals are close to continuous, running from the Sunday evening open in Asia to the Friday close in New York with a short daily break, because the metal is dealt over the counter in London and Zurich alongside the exchange contracts in New York. Energy follows its exchanges and runs for most of the day. Agricultural contracts are the narrowest, with a defined day session and, on some, an electronic session either side of it.

Liquidity within those hours is far from even. It concentrates around the London to New York overlap and the release windows for scheduled inventory and crop reports, and thins whenever the physical market underpinning a contract is closed. A quoted price exists throughout the session; the depth behind it does not, which is what widens spreads and produces gaps at the reopen.

How a CFD on a commodity settles 

A contract for difference written on a commodity references its price and settles in cash. No metal is refined, no barrel is loaded and no grain is delivered. The difference between the opening and closing price is multiplied by the number of units the contract covers, and that amount passes between the two parties. Units are stated in the physical measure the underlying market uses: troy ounces for precious metals, barrels for crude, and tonnes, bushels or pounds elsewhere.

Because the difference is calculated on the whole notional value while only a percentage of it is posted as margin, an adverse move is measured against the full contract rather than against the money posted, so a loss can exhaust the margin entirely and is not limited to the amount deposited. A favourable move is measured on exactly the same basis. Margin requirements on commodities are commonly set above those on major currency pairs, because the underlying markets gap and move further in a session.

Two mechanical details separate a commodity CFD from a currency one. A position held past the daily cut off carries a financing adjustment for as long as it stays open, and on a commodity that adjustment reflects the cost of carrying the underlying rather than an interest rate differential. And where the underlying is a dated futures contract rather than a spot market, the CFD inherits an expiry: it is closed at the prevailing price on the stated date or rolled into the following contract, on a date published in the specifications. Commodity instruments are dealt on MetaTrader 5, and are listed in full on the commodities and metals page.