Price of Commodities and CommEx overview

You might ask yourself, where do these producers like Barrick and Kinross sell to if not directly to consumers?

They deal in units of 10,000 ounces+ and as much as some people might like to keep gold in their secure safe at home, this level is generally reserved for jewelry makers and of course, commodity traders. With that said, let's talk about where commodities like gold are traded.

Naturally, the price of gold, copper, and other precious metals are traded at an exchange, much like stocks would trade on the Toronto Stock Exchange and the TSX Venture (http://www.tsx.com) and New York Stock Exchange (http://www.NYSE.com)

On the left I've added a price of commodity chart from KITCO (http://www.kitco.com) real time as of today.

As you can see from the green line it last traded at $873.

This price refers to the price of gold PER ounce.

Now it may be funny to imagine commodity traders in Armani suits running around throwing bars of one-ounce gold at each other, but that's certainly not what happens in the digital age. Traders use what's referred to as futures to get rid of all this logistic problem of heaving around heavy bricks of gold or commodity.

Futures (contract)

"In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract, but both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset their position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations."

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Suffice to say, there is plenty of speculation amongst the traders every day about which direction commodities are about to go, which leads to fluctuation of price as news about inflation, job data, major industries, energy price, etc come out to the market.

Tradtionally, gold and housing have been termed the best hedge against inflation. Thus, when you see the devaluation of the dollar (US) or higher than usual inflation data, your ounce of gold probably just went up by 1% or more!

Hope this brief overview has been helpful, please e-mail me if you have any inquiries!