What Are Commodities?
Crude oil, gold, copper, wheat… standardized physical goods traded in bulk. They're the raw materials of the world economy.
Concept clip · The raw materials of the world economy
About 25 s · Watch first, then try it
Key takeaways
- 1Commodities fall into three groups: energy, metals (precious / industrial) and agriculture.
- 2Goods of the same type and grade are interchangeable, which is why they can be traded in standardized form.
- 3A spot trade = delivering the physical goods and paying immediately (or within a short time).
- 4The "oil price" or "gold price" in the news is usually a futures or benchmark price; physical deals add or subtract a premium or discount on top.
Check your understanding
Get every question right to complete this lesson
1.Which of these is NOT a commodity?
2.Which group does gold belong to?
3.Which of these would be hardest to trade in a standardized way like a commodity?
Text version · Physical Commodities, lesson 1: “What Are Commodities?”
Crude oil, gold, copper, wheat… standardized physical goods traded in bulk. They're the raw materials of the world economy.
The raw materials of the world economy
A commodity is a standardized physical good traded in bulk, in three big groups: energy, metals (precious / industrial) and agriculture. Goods of the same grade can replace each other.
Spot: cash on delivery
spot trading means paying and delivering the physical goods now (or within a few days); the price is called the spot price.
The price in the news is a “benchmark”
The oil and gold prices in the news are mostly a futures contract or a benchmark quote. When goods actually change hands, buyers and sellers use this benchmark price as an anchor, then add or subtract a physical premium / discount for quality and location.
Key takeaways
- Commodities fall into three groups: energy, metals (precious / industrial) and agriculture.
- Goods of the same type and grade are interchangeable, which is why they can be traded in standardized form.
- A spot trade = delivering the physical goods and paying immediately (or within a short time).
- The "oil price" or "gold price" in the news is usually a futures or benchmark price; physical deals add or subtract a premium or discount on top.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Select “Shares in a company” and try putting it in any category: what happens? Where should it go?
- Put “Gold” into the right category, then check its pricing unit on the spec card.
- Sort all 10 cards, and try not to make a single mistake.
- In the “Fungibility experiment”, click “Swap places”: why does swapping the two barrels of oil make no difference, while the two companies' shares are completely different?
Quiz and explanations
- 1. Which of these is NOT a commodity?
- Answer: A company's stock.A stock is ownership of a company, not a physical good.
- 2. Which group does gold belong to?
- Answer: Precious metals.Gold, silver and platinum are all precious metals.
- 3. Which of these would be hardest to trade in a standardized way like a commodity?
- Answer: Custom handmade furniture.Every piece of handmade furniture is different and can't be swapped one for another. The key to a commodity is that units of the same grade are interchangeable.
Terms in this lesson
- benchmark price (Benchmark Price): A widely accepted reference price, such as a crude oil futures front-month price; physical deals are often priced off it plus or minus a premium or discount.
- commodity (Commodity): A standardized physical good traded in bulk, such as crude oil, gold, copper or wheat.
- spot (Spot): A trade delivered and paid for right away (or very soon); its price is the spot price.
- physical premium / discount (Physical Premium / Discount): How much a physical deal is priced above (premium) or below (discount) the benchmark, reflecting quality, delivery location and local supply and demand; not the same as a futures curve's contango or backwardation.