Commodity Market Fundamentals
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All markets are valued by a simple function between supply and demand; or at least that is how it seems throughout the typical economics 101 course. However, in reality, the components of supply and demand are highly complex and, some will argue, might be too overwhelming to effectively use as a speculative tool. Nonetheless, even those looking to trade commodities via technical analysis should have an overall idea of what might be impacting the data displayed on a price chart. It would be impossible to delve into market fundamentals in great depth within the scope of this writing, but I hope that you gain an understanding of price determinants and the ability to prioritize available information.
There are two basic forms of analyzing the commodity markets, or any market for that matter: technical and fundamental. By definition, fundamental analysis is the study of the “big picture.” This includes evaluating the overall economy, interest rates, currency fluctuations, growing or mining conditions, and other critical factors that work toward determining a fair market price for a particular commodity. Technical analysts, on the other hand, work on the premise that all known fundamental news is already known by market participants and is therefore accounted for in the price of a commodity.
There are traders at both extremes of the spectrum who have experienced large success and failure. Jim Rogers is perhaps one of the most well known success stories of fundamental commodity traders. However, the “Turtle Traders” made massive amounts of money with a simple trend-following trading method. Accordingly, it isn’t reasonable to assume that one method of speculation is better than the other. Likewise, I have a difficult time justifying a single approach to the markets.
With this assumption in mind, I feel that the optimal course of action is to focus on technical analysis but to be aware of market fundamentals. After all, prices are ultimately driven by supply and demand. In other words, entry and exit decisions are probably best left to technical aspects of a market, but traders should use fundamentals to determine an overall market bias.
–Carley Garner. Excerpted from Commodity Market Fundamentals (FT Press Delivers Insights for the Agile Investor).