Commodities are the raw materials of our world, the natural resources we use to build the things we need and use. Throughout human history, man has exploited our world’s natural resources to improve the quality of human life. Futures traders trade principally in commodities (and in currencies, though that’s not the topic of today’s post). Futures markets allow commercial users to mitigate the risk of fluctuating commodity prices and provide a means for futures traders and investors to profit from those price risks. If you’re going to trade in commodities, you should know a little about them both practically and historically.Our global economy is built on three basic types of commodities, the principal players in the futures market:
- Agricultural products. We use agricultural products to feed and clothe ourselves.
- Metals. We use metals to build tools and weapons to improve our existence and protect ourselves.
- Energy. We use energy — coal, gas, oil, etc. — to warm our homes and power our factories.
The history of commodities parallels the history of mankind and development of civilization. Man’s survival and development are tied to his ability to harness natural resources. Throughout history, civilizations and nations have thrived or perished based on their ability to cultivate agricultural products, develop metals and harness energy. In fact, the early ages of man — the stone age, the bronze age, the iron age — are defined by man’s ability to utilize increasingly complex natural materials to make tools and weapons. Survival depended on man’s ability to process increasingly complex metals in order to compete against and/or trade with his neighbors.
Nations have been founded and civilizations destroyed over the control of natural resources. In 1524, Francisco Pizarro’s Spanish conquistadors destroyed the entire Inca civilization in a vicious campaign to corner the South American gold market. In the late 1800’s, the British fought the bloody Boer War over control of South Africa’s gold and diamonds. The Persian Gulf War precipitated by Iraq’s invasion of Kuwait was essentially fought to stabilize global oil markets. Global economists and environmentalists predict that the world’s next great war will be fought over control of essential natural resources — water and arable land — made scare by the effects of global warming.
Throughout history, the fate and wealth of nations has been dictated by the presence and control of natural resources. This will not change and presents opportunities from which savvy futures traders can profit.
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