The Bull

Friday 18

April, 2014 2:20 AM

Industry Chart

TheBull PREMIUM

  • Resources

How Commodities Predict Market Movements

How Commodities Predict Market Movements

By Investopedia.com 26.03.2012


Copper is more than the main ingredient in wire and gold is more than what we wear on our fingers and around our necks. These commodities, along with others like oil and grains, are used by investors to gauge the health and short-term direction of the market, but how does it work? What do commodity prices tell us that we can use as traders?

The Love Affair With Gold
How Shale Fracking May Hurt Your Investment
Why Crude Oil Prices May Not Affect Pump Prices
7 Reasons You Shouldn't Invest In Oil
4 Commodities Affected By World Conflicts

Gold

Gold is the best-known commodity because it appeals to investors and non-investors alike. Consumers may not think of gold as an investible product, but the story of gold is actually complicated. Not only does it serve as a commodity, but also as a currency. In the latter part of 2011 and into 2012, it has taken on the behaviour of a stock often mirroring the overall market. Traditionally, gold tends to move in the direction opposite the market. Investors use gold as a market hedge, dumping money into the commodity when the market is trending lower. In times when it is acting like a commodity, investors watch gold closely. When they see money pouring into GLD, the ETF that tracks the performance of gold or gold futures markets, they believe that a market downturn may close at hand.

Copper

Copper doesn't have the allure of gold since it's a base metal used largely for industrial purposes, but that doesn't change the fact that investors watch it closely for hints of the overall market sentiment. Because Copper is an industrial metal, investors use it as a way to gauge the health of the manufacturing and housing sectors of the world's economies.

Investors also use Copper as a way to gauge trader sentiment. When copper is rising, some see that as investors having an appetite for risky assets, since Copper is known as a volatile commodity. When copper loses value, it may indicate that investors are selling risky assets and a market correction may be imminent.

Oil

If gold is the best-known commodity, oil isn't far behind. Oil, and the way it is priced and traded, become talking points around water coolers and on the news, particularly when the price of gas is rising; but savvy investors know that oil has a big effect on the stock market.

Since somebody's win is always somebody else's loss, oil can only go up so much before stocks begin to feel the pinch. The Wall Street Journal reports that the recent oil rally has caused transportation stocks to come under pressure and this will cause consumers to stop spending, if the rally continues. As oil rallies, those not invested in oil and energy stocks quickly become defensive.

Not That Simple

If investors could look at the performance of these commodities and gauge the movement of the market, then everybody would be rich, so it must not be that simple. In fact, many experts believe that other factors, such as ETFs, have an artificial impact on the price of commodities. The SPDR Gold ETF has a market cap of $60 billion and holds gold in its London vault equal to the value of the fund. With this amount of gold out of circulation, that may drive the price of gold up.

In 2008, oil speculators were blamed en masse for the run-up of oil prices, but others claim that with the massive amounts of money pouring into commodity markets, such as oil, a few large investors making predictions about the future direction of a commodity could artificially move the price. All of these factors combine to make analyzing moves in commodities an educated guess that can only be used in combination with other factors.

The Bottom Line

Although commodities may not move based strictly on supply and demand, investors use their price movements to gauge the overall sentiment of the market and make short-term decisions of where the market may go. Start watching these commodities and see if they predict the market corrections that are sure to come.

>> Next article - click here to read other articles 

 



FROM THE NEWSLETTER

Revenues up, but the future is still bleak for Ten

Ten Network has delivered a significantly... More

Don't be misled on Chinese foreign investment: read the facts

NSW has attracted the majority of Chinese... More

Stocks on a roll: ASX rolling 52-week highs

ASX rolling 52-week highs for the previous... More



WHAT’S ON THIS WEEK

week 18 April 2014
    • 14
    • 15
    • RBA Minutes of Reserve Bank of Australia monthly board meeting released | 1:46 AM
    • RIO Rio Tinto first quarter production report | 1:48 AM
    • RIO Rio Tinto annual general meeting | 1:49 AM
    • OZL OZ Minerals first quarter production report | 11:44 PM
    • RBA Speech by RBA assistant governor (financial markets) Guy Debelle, on the Australian Bond Market to the Economic Society of Australia Luncheon | 11:46 PM
    • 16
    • ALZ Australand Property Group annual general meeting | 12:49 AM
    • FMG Fortescue Metals Group third quarter production report | 11:17 PM
    • BHP BHP Billiton third quarter production report | 11:45 PM
    • Westpac/Melbourne Institute Westpac-Melbourne Institute Leading Indexes of Economic Activity | 11:45 PM
    • 17
    • STO Santos first quarter production report | 12:08 AM
    • CKF Collins Foods general meeting | 12:08 AM
    • WPL Woodside Petroleum first quarter production report | 1:43 AM
    • NAB National Australia Bank's business survey for the March quarter | 1:47 AM
    • ABS ABS International merchandise imports for March | 1:47 AM
    • ABS Australian Bureau of Statistics (ABS) new motor vehicle sales for March | 11:45 PM
    • 18

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search

STOCK QUOTE

Don't know the company code? Click here



Featured Comment

Like their internet predecessors, this group of disruptors is best bought during significant bouts of sharemarket weakness.

The next big internet stocks, buy on the cheap

Broker buys

  • ASX Code
  • Company
  • Broker
  • NABNABLonsec
  • PPTPerpetualLonsec
  • FXLFlexigroupLincoln
  • AGIAinsworthLincoln
  • MTUM2 GroupCalibre
  • AFJAffinityCalibre

Broker sells

  • ASX Code
  • Company
  • Broker
  • MTSMetcashLonsec
  • MYRMyerLonsec
  • XROXeroLincoln
  • MCSMcAleeseLincoln
  • MTSMetcashAlpha Securities
  • SBMSt BarbaraAlpha Securities

Central Banks Rates

  • RBA2.50%
  • FED0.25%
  • BOE0.50%
  • BOC1.00%
  • RBNZ2.75%
  • ECB0.25%
  • SNB0.00%
  • BOJ0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.
  • CUPCountplus Limited, 110.26c, 100%24/04/14
  • SSTSteamships Trading Co Ltd, 62c, 0%28/04/14
  • MFFMagellan Flagship Fund, 1c, 0%29/04/14
  • PPKPPK Group Ltd, 1.5c, 100%29/04/14
  • WATWaterco Limited, 3c, 100%07/05/14
  • TWDTamawood Limited, 8c, 100%09/05/14
  • UOSUnited Overseas Aus Ltd, 2c, 0%14/05/14
  • EALE&A Limited, 2.75c, 100%29/05/14
  • AQZAlliance Aviation Svcs, 3.6c, 100%03/06/14
  • KMDKathmandu Hld Ltd, 2.4c, 100%04/06/14

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target
  • DOWDowner EDI Limited$5.778
  • FMGFortescue Metals Grp Ltd$6.893
  • ORAOrora Limited$1.514
  • RIORio Tinto Limited$81.219
  • MBLMacquarie Bank Ltd$104.744

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date
  • HUAHuaYi Resources Ltd15/05/14
  • AOWAmerican Patriot Oil & Gas Ltd12/05/14
  • ACQAcorn Capital Investment Fund30/04/14
  • TOF360 Capital Office Fund24/04/14
  • FTHFifth Element Res Ltd17/04/14

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.