Price is where supply meets demand
Fundamental analysis of a commodity is the study of the economic, political and natural factors that influence its supply and demand, and through them its price. The syllabus lists what the analyst watches: supply and demand factors, seasonality, macroeconomic conditions, news, currency movements, interest rates, weather, inventory levels and government intervention. The rest of this topic sorts those into the three lists the exam draws from.
Supply factors
Demand factors
Weather shows up on the list of things to watch and on the supply list, because floods and droughts change how much is produced. Seasonal demand is a demand factor. A question that offers "weather" as a demand factor is testing exactly this placement.
Macroeconomic indicators
Inflation: commodities, especially gold and silver, act as an inflation hedge, so inflation supports them. Interest rates: higher rates strengthen the US dollar, which lowers commodity prices. Trade balance and industrial data: the Purchasing Managers' Index and industrial production affect demand for metals and energy.
A central bank raises rates sharply. The dollar strengthens. Dollar-priced commodities become more expensive for holders of other currencies, demand softens at the margin, and prices fall. The same chain runs in reverse when rates are cut, which is why the gold case in the next topic lists an expansionary monetary policy as positive for gold.
Supply answers "how much gets produced and delivered": output, weather, policy, geopolitics, input costs. Demand answers "who wants it and why": growth, population and cities, substitution, seasons, preferences. Macro answers "what is the money doing": inflation, rates, trade and industrial data.
- Commodity fundamental analysis studies the economic, political and natural factors that shape supply and demand and therefore price: supply and demand, seasonality, macro conditions, news, currency, interest rates, weather, inventories and government intervention.
- Supply factors: production, weather, government policies (tariffs, levies, trade restrictions and promotion, subsidies), geopolitical events (sanctions, wars, trade disputes) and input costs (energy, inputs, wages, technology).
- Demand factors: global economic growth, population growth and urbanisation, the substitution effect, seasonal demand and consumer preferences (organic food, renewable energy, electric vehicles).
- Macro indicators: inflation (commodities, especially gold and silver, hedge it), interest rates (higher rates strengthen the US dollar and lower commodity prices), and trade balance and industrial data such as PMI and industrial production, which drive metals and energy demand.