Commodities and the trade of commodities is nothing new. As a matter of fact, commodity trading has a long history, going back to ancient times. The first commodities to be traded are believed to be sheep and goats. However, instead of trading the sheep and goats directly, a currency was created as a form of contract. This currency coupon would be backed by a specific number of sheep or goat, or a combination thereof; hence, the creation of the first commodity backed currency.
In these days, the currency coupon came in the form of clay figures with numbers printed or embedded into them. The clay figure with the number would then act as a form of I.O.U. stating that the number on the coupon is the number of livestock owed from one party to the other. Therefore, the party with the clay coupon would have the ability to exchange the coupon for its value at any time.
However, the clay figure (believed to be a pot) structure would not last long as concerns over counterfeit currency started to grow. Soon, traders would shake the clay figures to ensure that they were made properly; however, as a result of old age, many of them would break anyway. Soon the clay figures were no longer in use, but trade continued. At that time, traders would keep track of their commodity trades using basic tablets.
Fast Forward Several Centuries
These days, trade isn’t quite as shaky and uncharted of territory as it was in the past. There are specific checks and balances in place to ensure that the commodities market is safe for traders. There have also been several advancements in the concept of commodities trading that has made the process much more complex. These days, we see derivative trading, direct physical trades, and several different types of trade contracts.
Also, continuing advancements in finance law are making it easier and easier for newcomers to get into trading commodities. As a matter of fact, exchange trades increased in volume at the beginning of the century as court appeals changed the way we viewed commodities. In 2007, following a major appeal, issued contracts around the world reached more than 2.5 billion agreements; a trend that would last for more than 3 years.
During this time, international exports started to decline, falling by around 2%; ultimately causing declines in the price of derivatives. As a result, sovereign pensions and funds were met with a vastly increasing demand and were flooded with extra resources to put into assets that included several different types of commodities; ultimately leading to the rise of contracts issued around the world.
This movement is a great example of why many investors have given commodity investments the name “safe-haven”. As exports dropped around the world in 2007, investors felt danger; knowing that they had to do something to protect their investments. The vast majority of investors looked into commodities as a way to keep their money safe and out of the way of disheartening market movement. As a result, we would see an increase in the price of commodities like gold, silver, platinum, and others.
So, commodities essentially move along with worldwide market conditions. If worldwide market conditions are good, we can expect to see stabilization or declines in the value of commodities. On the other hand, when economic and market conditions around the world are poor, the exact opposite is true and we tend to see increases in the values of commodities.