How Macroeconomic Factors Impact Commodities Price

Commodities are essential to any economy because they serve as food, a store of financial value and the raw materials used to produce a wide range of goods and services. The most traded commodities are agricultural products such as wheat and sugar, energy sources like oil and gas, and metals like gold and silver. The prices of these commodities fluctuate in response to economic and geopolitical developments. For example, inflation rates can drive up the cost of food (and other commodities such as gold and oil). But how do these factors influence the market?

Opportunities in Commodity Markets 
Since commodities are traded by countries worldwide, their prices are set on a global scale. However, these prices are not fixed. They fluctuate constantly based on demand and economic conditions across different countries, and a better understanding of these price movements for UK traders creates trading opportunities in commodity markets. 

There are various ways to trade commodities, and spread betting is one popular approach. In spread betting, traders don't own physical commodities but speculate on price movements through a broker. This makes it easier to participate in commodity markets without handling actual goods. 

Traders looking to get involved in commodity markets must monitor various economic factors. This makes it easier to predict price movements and make informed trading decisions.  

Macroeconomic Factors That Influence Commodity Prices 

Inflation 

Inflation is a leading factor influencing commodities prices. For instance, the price index for agricultural outputs increased by 3.9% in the UK between November 2023 and November 2024. According to the Office for National Statistics, this was a direct result of inflation, which increased by 2.5% in the same period. Where higher inflation often increases prices, especially for primary commodities like food and energy, lower inflation may result in price falls. In the year to December 2024, producer input prices fell by 1.5%, influenced by monetary policies and the overall economic environment. 

Interest Rates 

Interest rates arise from monetary policies which governments use to control inflation. Interest rates impact the cost of storing and carrying commodities. Higher interest rates increase the cost of holding commodity inventories and the final consumer price, and when this happens, demand for consumer goods falls and can crash their prices. Lower interest rates increase the commodity demand and prices. 

Gross Domestic Product (GDP) Growth 

Economic growth is a major factor driving commodity demand and prices. As the GDP increases, the demand for raw materials and energy increases, resulting in higher commodity prices. Countries with strong GDPs often experience greater consumption and production. Hence, the prices of commodities like steel, oil, and agricultural products are typically high. 

Speculative Trading 

Commodities react to market speculation, especially when traders anticipate events. For example, gold broke $2,700 in October 2024 in anticipation of Federal Reserve rate cuts. This happens because lower interest rates make currencies less attractive to investors, increasing the demand for alternative assets like gold. Another example is the extreme volatility in coffee prices in 2024, partly due to the aggressive buying and selling of futures contracts based on market speculation. In such cases, spread betting is a common way for traders to speculate on commodity prices. As traders predict market movements — that is, as they speculate — commodity demand changes and influences the prices. 

Currency Fluctuations 

Countries import and export commodities, and since commodity prices are priced in fiat currencies, exchange rates impact the final prices. In the UK, imported commodities may be less expensive when the British pound strengthens than the US dollar or euro. Conversely, commodity prices may increase if the pound weakens. Exchange rates also affect inflation, affecting commodity prices and export competitiveness. 

Global Trade Policies and Geopolitical Events 

Global events that affect the economy affect financial markets, especially commodities. Geopolitical events can disrupt trade routes, alter policies, and impose tariffs or market barriers. They can also impact macroeconomic stability and inflation and create uncertainties with far-reaching effects. 

Strategies for Trading Commodities 

Commodity trading primarily happens in physical markets where traders buy, sell, and exchange goods. However, investors and traders also explore online trading, where they can speculate on prices without purchasing underlying assets. Here are three important strategies for trading commodities. 

Leveraged Trading 

Most brokers allow speculators to leverage their positions, controlling more money than their capital. Leveraged trading is common in financial markets and can increase potential profits. UK brokers offer up to 30:1 leverage.  

Diversification 

Diversification involves spreading trading capital over several instruments and access. Spreading investment enhances risk management and maximises returns. A good diversification plan for spread betting includes highly volatile commodities like crude oil, gold, and High-Sulphur Fuel Oil (HSFO) and low-volatile commodities like natural gas, food, and agricultural products. 

You can also diversify by investing in different regions to avoid political risk. For example, spread betting commodities whose prices are influenced by the Middle East geopolitical situation and those influenced by the UK or Western markets can maximise returns. 

Trading the Trend 

Market trends guide traders in predicting prices. Commodity prices are largely seasonal and follow trends. In Bath, for instance, Lumber prices are typically low in October, and grains (wheat, soybean, corn) are higher during the planting season but lower during harvest. Natural gas prices also increase during winter due to higher demand. Fundamental analysis of macroeconomic factors helps traders to understand trends and prices. The ongoing trade war between the US, Canada, and Mexico allows investors to trade the trend. 

It is important to trade with a global broker that offers excellent conditions for spread betting on commodities. A good broker provides technical tools to study and understand markets and the impact of macroeconomic factors. Ultimately, as a UK trader, you’ll need to stay updated with global and local events, such as the Bath Farmers’ Market and others influencing prices.