How Commodities Predict Market Movement
Gold, Copper and Oil, in addition to having intrinsic value and being valuable in and of themselves, can be very valuable to traders of many other commodities. These and a few other commodities are used by traders to access the direction of the market. But how? What can the prices of these commodities tell us about the market in general?
Gold traditionally moves in the opposite direction of the commodity market. It might be because gold is also a form of currency. Many traders use Gold as an indicator of the market direction and put extra resources into trading gold when it the market trends lower.
Copper can be an indicator of the world’s industrial growth. Because copper is mostly used in the housing, and manufacturing worlds, when there is more demand, you can assume there is more growth in that section of the economy which will then lead to general financial growth and an upswing in almost every other market.
Copper is also known to be a very volatile commodity so when there is an upturn in copper prices it means traders are taking more risk which implies the economic climate is a positive one. Likewise, when people are selling off their copper, it means they are looking to exit a risky market so the market might be correcting itself.
Oil is almost as popular a commodity as gold and the truth is the price of oil affects the everyday lives of many more people than gold does. The price of oil affects the price of almost everything else in the world. A rise in the price of oil affects the stock market because everyone’s price of doing business rises. Which of course, is an indicator of prices of other commodities.
Certain commodities pricing has been known to be reasonable predictors of market movement in the short term but have not been as successful in providing fair assumptions for the longer term. The demands in the commodity market stay similar within a 6-month period and move more over a longer period of time.
Clearly using certain commodities to gauge the rest of the market is not a foolproof way of trading because if it was, everyone would be trading commodities and be successful all the time. Since not all of us are wealthy commodities traders it would be safe to assume that there are many other factors that are involved in predicting market movement. Some of these factors are predictable and some are not.
The amount to which you can rely on these commodities as predictors can be tested relatively easily. You can follow these prices, and make imaginary moves based on the implications and see if it tests out to be a good strategy for you. You can test this over a shorter period of time or a longer one.