The commodities market is regarded as one of the basic forces that drive global financial markets. From the perspective of energy (oil and gas commodities) to food and horticulture, as well as precious metals, all these commodities are exchanged globally in trillions of dollars worth of market value.
In many cases, commodity prices have been used by analysts to predict the future direction of financial markets. Oil, for example, affects several industries across the world. From travel to the heavy industrial plants, as well as, the transportation market. Several global economies, especially in the middle east, north Africa and some parts of Latin America are driven by oil.
Gold, on the other hand, used to play a crucial role in the global banking system in the Gold Standard system. Its impact on the monetary value of various currencies has diminished over time, but it often comes into play during an economic crisis when investors try to put some of their investments in safe havens.
So, what does the future hold for gold and silver?
In today’s markets, gold and silver are technically currencies and not commodities. Yet, theoretically, they are two of the most commonly traded commodities. The economics of the two has been moving from bars and coins into the digital space and things could get more interesting in the next few years.
Cryptocurrency startups are now using them to back their token sales, as blockchain technology continues to revolutionize markets. While digital trading of gold has always offered enough liquidity, things have been a little different for silver as a commodity.
Nonetheless, these commodities could become even more liquid and easily accessible to ordinary investors as more of them are added to blockchains. This could also provide a basis for their re-invention in the global financial markets.
When you look at the emphasis given to the likes of bitcoin and Ethereum in the digital economy, it is not hard to imagine how influential gold and silver could become once again if they made a complete transition to the digital space.
Currently, gold and silver prices tend to trend higher longer when some countries’ central banks are restocking their reserves with physical gold in anticipation of an economic slowdown, or in an attempt to stimulate their local currencies. Russia, for instance, has been doing this regularly over the last few years, while India and Poland were also major players in 2018.
If the tables could be reversed such that, the digital market place dictates the prices of gold and silver more, then there is a high chance that they could become major forces again in the global financial marketplace.
Diamonds too are precious commodities, so why aren’t they traded as such?
The monopoly in the diamonds market may have ended, but they are still primarily sold as jewelry. Diamonds have no value an industrial application perspective and this sets them apart from other commodities.
Furthermore, they do not have a specific standardization or benchmark that market players can use to trade it. Oil is sold or traded by the barrel, gold and silver can be traded in ounces, while most food commodities like coffee, can be traded in Kilograms or ounces.
With diamonds, the 4Cs come into play when investing. We talk of carat weight, cut, color and clarity all contributing to the price of a diamond. And then we also have the issue of certified and non-certified (loose) diamonds. All these make things tricky for those looking to make an investment in diamonds.
Putting all these in a digital platform that allows traders to quickly open and close trades has proven to be a challenging task. There could be several varieties priced based on the 4Cs with only a few probably available for each carat weight, color, clarity, and cut.
However, with companies like IBM (NYSE:IBM) and De Beer’s coming up with blockchain-based digital ledgers (TrustChain and Tracr, respectively) that will allow market players to verify and track individual diamonds from mine to the jeweler, things could change soon. Once enough diamonds ate put in blockchains, trading could become opensource with ordinary investors gaining access via various crypto exchanges.
In addition, technological advances have made it possible for companies to manufacture diamonds in labs. This could also help reduce the scarcity in the market and in turn boost liquidity. The next few years will be interesting.
Oil, a precious resource, the ‘black gold’
That black substance that comes out of the ground after ‘ground-breaking’ hours of drilling has made nations, oligarchs, and multi-national corporations rich. And that’s what has earned it the nickname ‘black gold’.
Yet in recent years, the price of oil has become most volatile when compared to its historical fluctuations. Over the last few years, we have watched the prices of WTI Crude Oil and Crude Brent rally to over $100 before falling below $40. They then bounced back to trade above $70.00 before retracting again to the current levels of about $50 for WTI Crude and about $60 for Crude Brent. This is volatility at its finest.
Back in the ages when just a few countries and a few companies had the technology to drill oil, prices were dictated by the demand. Now, production and supply play the key role because of the rise of the industrialized economy and a world that is now closely knitted together through revolutionary transportation methods. Demand for oil appears to have peaked, which means there is little room for improvement.
Nearly every country in the world now has an oil well of its own, as the ‘black gold’ rush continues. This effectively minimizes the growth opportunity for the demand for the commodity in the market. As such, eyes have now turned to production capacities and predicted supply for the next few months. Oversupply and geopolitical imbalances have mostly been the main causes of a decrease or an increase in oil prices.
Furthermore, the global push to try to minimize industrial activities that cause climate change and global warming have also seen companies launch revolutionary methods to produce renewable energy. Companies are now investing in offshore wind-power, where ocean currents guarantee better power output than land-based windmills, which are affected by physical and man-made obstacles like mountains and tall buildings. Mega solar plants like the one in Morrocco are also being built to boost solar energy production, which is by far the most efficient source of energy once a plant is set.
As such, fossil fuels like oil could face more turbulence in the long-term future, but for now, they remain a crucial item of the global economy. When gas prices go up, a lot of things do as well.
Unlike gold, silver, and diamonds whose shiny and sparkling appearances make them precious, oil is a precious commodity purely on the basis of its usefulness. Its long-term future may not be as promising as it was in the past, but it still has a few more decades to power the world.
Conclusion
In summary, precious commodities impact the markets differently. Some of them like oil, are basic for commerce and drive the GDPs of those countries while others like gold, silver, and diamonds draw their value from their sparkle or shine and are mostly considered a luxury. The blockchain technology could make some of these ‘somewhat scarce’ commodities more available to ordinary investors from a trading perspective. The future looks interesting.