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Module 4 · Lesson 1 of 7Commodities are the raw materials the world runs on, from oil and gold to wheat and copper. This lesson explains what makes something a commodity, how the main groups differ and why their prices behave the way they do.
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A commodity is a raw material or primary product that is bought and sold in bulk, where one unit is essentially the same as any other unit of the same grade. The technical word for this sameness is fungible. One barrel of a given grade of crude oil is, for trading purposes, interchangeable with another barrel of that grade. One tonne of a standard grade of copper is the same wherever it came from.
That is very different from, say, a house or a painting. Every house is unique, so each sale is negotiated individually. Because commodities are interchangeable, they can be traded on large exchanges with standard contract sizes, standard quality grades and a single market price that everyone can see.
A commodity competes mainly on price, not on brand. If a product is interchangeable, the market price is the story. That is why commodity prices move so visibly with news about supply and demand.
For a trader, this matters because commodity markets are among the oldest and most liquid in the world. Farmers and miners used them long before the modern financial system existed, and the same basic logic still applies: producers want to lock in a price, consumers want to avoid price surprises, and traders take the other side of those needs. If you want the wider picture of market participants, the who moves markets lesson covers it, but you do not need it to follow this one.
Commodities are usually split into hard and soft groups. Hard commodities are mined or extracted. Soft commodities are grown or raised.
| Group | Examples | What mostly drives price |
|---|---|---|
| Energy (hard) | Crude oil, natural gas, coal | Production decisions, economic activity, weather, politics |
| Precious metals (hard) | Gold, silver, platinum, palladium | Safe-haven demand, interest rates, currency moves, industrial use |
| Industrial metals (hard) | Copper, aluminium, nickel, iron ore | Construction and manufacturing demand, mine supply |
| Agriculture (soft) | Wheat, corn, soybeans, coffee, sugar, cotton | Weather, harvest size, trade policy, stock levels |
| Livestock (soft) | Cattle, hogs | Feed costs, disease, consumer demand |
Gold sits in the precious metals group, but it behaves differently from most of the rest. Most commodities are consumed: oil is burned, wheat is eaten, copper ends up in wiring. Gold is rarely used up. Almost all the gold ever mined still exists, which is one reason investment and central bank demand matter so much for its price. The later lesson on the history of gold and money explains why.
Commodity prices are driven by supply and demand, and both can be slow to adjust. This is the key to understanding their volatility.
When supply is slow and demand is inflexible, a small shift in either can cause a large price move. Economists call this low elasticity. If you want a refresher on the basic mechanics, see supply, demand and price.
Suppose (hypothetically) a country's wheat harvest is hit by drought and the world supply is expected to be a few per cent lower than usual. Buyers still need roughly the same amount of wheat. Because it takes a year to grow more, the only way the market can balance is for the price to rise until some buyers cut back or switch to alternatives. A small shortfall in quantity can therefore produce a much larger move in price. The reverse also happens: a bumper harvest can push prices down sharply.
Commodities are also priced in US dollars in most global markets. A stronger dollar makes them more expensive for buyers using other currencies, which can weigh on demand. That is one link between the forex market and the commodity market, and it is one reason gold traders watch the dollar so closely.
The spot price is the price for delivery now (or within a very short time). The futures price is the price agreed today for delivery on a set date in the future. Most large commodity trading happens through futures contracts, which you can read about in forwards and futures.
Because quality and location matter for physical goods, markets use benchmarks: agreed reference grades that everyone quotes. In oil, Brent and West Texas Intermediate (WTI) are the two best known. In gold, the spot price is quoted per troy ounce in US dollars, which is why the pair is written XAUUSD. Other grades and locations trade at a premium or discount to the benchmark.
One important point: futures prices usually differ from spot because of storage, financing and expectations. When the futures price is above spot the market is in contango. When it is below spot the market is in backwardation. This matters when someone holds a position for months, because rolling from one contract to the next can add cost or gain. It matters little for a short-term trade on a CFD that tracks the spot price, though financing charges can still apply.
Retail traders almost never take delivery of barrels or tonnes. They trade price exposure, usually through CFDs or futures-style products, and leverage can magnify both gains and losses. Commodity markets can gap on news such as an inventory report or a supply decision, so a stop-loss order is not a guarantee of exit at your chosen price.
Leveraged commodity CFDs can lose money quickly. Fast-moving markets can slip past stop levels, and you can lose more than you intended if you use too much leverage. Only use money you can afford to lose and check the rules your regulator applies, as they change over time.
Gold is a good place to start precisely because it has one deep, well-covered market that trades nearly around the clock. Once you understand how a commodity is defined and priced, the rest of this module shows how gold became money, why central banks hold it and how other commodities compare. For the trading side, the gold trading for beginners lesson covers how XAUUSD works as a CFD.
It is a commodity in the sense that it is a raw material with a market price, but it also has a long history as money and is held by central banks as a reserve asset, so it is often treated as a category of its own.
You do not need deep industry knowledge, but knowing the main drivers for each market, such as weather for crops or inventories for oil, helps you understand why prices move.
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