Commodity markets are markets where raw or primary products are exchanged.

These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.

This article focuses on the history and current debates regarding global commodity markets.
It covers physical product (food, metals, electricity) markets but not the ways that services,
including those of governments, nor investment, nor debt, can be seen as a commodity.
Articles on reinsurance markets, stock markets, bond markets and currency markets cover
those concerns separately and in more depth. One focus of this article is the relationship
between simple commodity money and the more complex instruments offered in the
commodity markets.

History
The modern commodity markets have their roots in the trading of agricultural products.
While wheat and corn, cattle and pigs, were widely traded using standard instruments in the
19th century in the United States, other basic foodstuffs such as soybeans were only added
quite recently in most markets.[citation needed] For a commodity market to be established, there
must be very broad consensus on the variations in the product that make it acceptable for one
purpose or another.

The economic impact of the development of commodity markets is hard to overestimate.

Through the 19th century "the exchanges became effective spokesmen for, and innovators of,
improvements in transportation, warehousing, and financing, which paved the way to
expanded interstate and international trade."[citation needed]

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs,
rare seashells, or other items as commodity money, people have sought ways to standardize
and trade contracts in the delivery of such items, to render trade itself more smooth and
predictable.[citation needed]

Commodity money and commodity markets in a crude early form are believed to have
originated in Sumer where small baked clay tokens in the shape of sheep or goats were used
in trade. Sealed in clay vessels with a certain number of such tokens, with that number
written on the outside, they represented a promise to deliver that number. This made them a
form of commodity money - more than an I.O.U. but less than a guarantee by a nation-state
or bank. However, they were also known to contain promises of time and date of delivery -
this made them like a modern futures contract. Regardless of the details, it was only possible
to verify the number of tokens inside by shaking the vessel or by breaking it, at which point
the number or terms written on the outside became subject to doubt. Eventually the tokens
disappeared, but the contracts remained on flat tablets. This represented the first system of
commodity accounting.[citation needed]

Classical civilizations built complex global markets trading gold or silver for spices, cloth,
wood and weapons, most of which had standards of quality and timeliness. Considering the
many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along
the trade routes, it was a major focus of these civilizations to keep markets open and trading
in these scarce commodities. Reputation and clearing became central concerns, and the states
which could handle them most effectively became very powerful empires, trusted by many
peoples to manage and mediate trade and commerce.[citation needed]

Size of the market

The trading of commodities consists of direct physical trading and derivatives trading.
Exchange traded commodities have seen an upturn in the volume of trading since the start of
the decade. This was largely a result of the growing attraction of commodities as an asset
class and a proliferation of investment options which has made it easier to access this market.

The global volume of commodities contracts traded on exchanges increased by a fifth in

2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up
to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding
value of OTC commodities derivatives declined by two-thirds as investors reduced risk
following a five-fold increase in value outstanding in the previous three years. Trading on
exchanges in China and India has gained in importance in recent years due to their emergence
as significant commodities consumers and producers. China accounted for more than 60% of
exchange-traded commodities in 2009, up on its 40% share in the previous year.

Commodity assets under management more than doubled between 2008 and 2010 to nearly
$380bn. Inflows into the sector totalled over $60bn in 2010, the second highest year on
record, down from the record $72bn allocated to commodities funds in the previous year. The
bulk of funds went into precious metals and energy products. The growth in prices of many
commodities in 2010 contributed to the increase in the value of commodities funds under
management.[1]

Commodities trading
Spot trading

Spot trading is any transaction where delivery either takes place immediately, or with a
minimum lag between the trade and delivery due to technical constraints. Spot trading
normally involves visual inspection of the commodity or a sample of the commodity, and is
carried out in markets such as wholesale markets. Commodity markets, on the other hand,
require the existence of agreed standards so that trades can be made without visual
inspection.

Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future
date a given quantity of a commodity for a price defined today. The fixed price today is
known as the forward price.

Futures contracts
A futures contract has the same general features as a forward contract but is transacted
through a futures exchange.

Commodity and futures contracts are based on what’s termed forward contracts. Early on
these forward contracts — agreements to buy now, pay and deliver later — were used as a
way of getting products from producer to the consumer. These typically were only for food
and agricultural products. Forward contracts have evolved and have been standardized into
what we know today as futures contracts. Although more complex today, early forward
contracts for example, were used for rice in seventeenth century Japan. Modern forward, or
futures agreements, began in Chicago in the 1840s, with the appearance of the railroads.
Chicago, being centrally located, emerged as the hub between Midwestern farmers and
producers and the east coast consumer population centers.

In essence, a futures contract is a standardized forward contract in which the buyer and the
seller accept the terms in regards to product, grade, quantity and location and are only free to
negotiate the price.[2]

Hedging

Hedging, a common (and sometimes mandatory[citation needed]) practice of farming cooperatives,

insures against a poor harvest by purchasing futures contracts in the same commodity. If the
cooperative has significantly less of its product to sell due to weather or insects, it makes up
for that loss with a profit on the markets, since the overall supply of the crop is short
everywhere that suffered the same conditions.

Whole developing nations may be especially vulnerable, and even their currency tends to be
tied to the price of those particular commodity items until it manages to be a fully developed
nation. For example, one could see the nominally fiat money of Cuba as being tied to sugar
prices[citation needed], since a lack of hard currency paying for sugar means less foreign goods per
peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes
to maintain a stable quality of life for its citizens.[citation needed]

Delivery and condition guarantees

In addition, delivery day, method of settlement and delivery point must all be specified.
Typically, trading must end two (or more) business days prior to the delivery day, so that the
routing of the shipment can be finalized via ship or rail, and payment can be settled when the
contract arrives at any delivery point.

Standardization
U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of
GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced
in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a
mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin
origin produced in the U.S.A. (Non-screened, stored in silo)." Note the distinction between
states, and the need to clearly mention their status as GMO (Genetically Modified Organism)
which makes them unacceptable to most organic food buyers.
Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork
bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock,
meats, poultry, eggs, or any other commodity which is so traded.

Regulation of commodity markets

Cotton, kilowatt-hours of electricity, board feet of wood, long distance minutes, royalty
payments due on artists' works, and other products and services have been traded on markets
of varying scale, with varying degrees of success.[citation needed]

Generally, commodities' spot and forward prices are solely dependent on the financial return
of the instrument, and do not factor into the price any societal costs, e.g. smog, pollution,
water contamination, etc. Nonetheless, new markets and instruments have been created in
order to address the external costs of using these commodities such as man-made global
warming, deforestation, and general pollution. For instance, many utilities now trade
regularly on the emissions markets, buying and selling renewable emissions crs and
emissions allowances in order to offset the output of their generation facilities. While many
have criticized this as a band-aid solution, others point out that the utility industry is the first
to publicly address its external costs. Many industries, including the tech industry and auto
industry, have done nothing of the sort.

In the United States, the principal regulator of commodity and futures markets is the
Commodity Futures Trading Commission but it is the National Futures Association that
enforces rules and regulations put forth by the CFTC.

Oil

Building on the infrastructure and cr and settlement networks established for food and
precious metals, many such markets have proliferated drastically in the late 20th century. Oil
was the first form of energy so widely traded, and the fluctuations in the oil markets are of
particular political interest.

Some commodity market speculation is directly related to the stability of certain states, e.g.
during the Persian Gulf War, speculation on the survival of the regime of Saddam Hussein in
Iraq. Similar political stability concerns have from time to time driven the price of oil.

The oil market is an exception. Most markets are not so tied to the politics of volatile regions
- even natural gas tends to be more stable, as it is not traded across oceans by tanker as
extensively.

Commodity markets and protectionism

Developing countries (democratic or not) have been moved to harden their currencies, accept
IMF rules, join the WTO, and submit to a broad regime of reforms that amount to a hedge
against being isolated. China's entry into the WTO signalled the end of truly isolated nations
entirely managing their own currency and affairs. The need for stable currency and
predictable clearing and rules-based handling of trade disputes, has led to a global trade
hegemony - many nations hedging on a global scale against each other's anticipated
protectionism, were they to fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade sanctions against
Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners
Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime perhaps
more driven by political concerns - jobs, industrial policy, even sustainable forestry and
logging practices.

Commodities exchanges
Main article: Commodities exchange

Largest commodities exchanges

Exchange Country Volume per month $M

CME Group USA 19[3]
Tokyo Commodity Exchange Japan -
NYSE Euronext EU -
Dalian Commodity Exchange China -
Multi Commodity Exchange India -
Intercontinental Exchange USA, Canada, China, UK -

GOLD
Gold exchange-traded products are exchange-traded funds (ETFs), closed-end funds (CEFs) and
exchange-traded notes (ETNs) that aim to track the price of gold. Gold exchange-traded products are
traded on the major stock exchanges including Zurich, Mumbai, London, Paris and New York. As of
25 June 2010, physically backed funds held 2,062.6 tonnes of gold in total for private and
institutional investors.[1] Each gold ETF, ETN, and CEF has a different structure outlined in its
prospectus. Some such instruments do not necessarily hold physical gold. For example, gold ETNs
generally track the price of gold using derivatives.

History
The first gold exchange-traded product was Central Fund of Canada, a closed-end fund
founded in 1961. It later amended its articles of incorporation in 1983 to provide investors
with an exchange-tradable product for ownership of gold and silver bullion. It has been listed
on the Toronto Stock Exchange since 1966 and the AMEX since 1986.[2]
The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset
Management Company Private Ltd in India when they filed a proposal with the SEBI in May
2002. However it did not receive regulatory approval at first and was only launched later in
March 2007.[3] The first gold ETF actually launched was Gold Bullion Securities, which
listed 28 March 2003 on the Australian Stock Exchange. Graham Tuckwell, the founder and
major shareholder of ETF Securities, was behind the launch of this fund.[4]

Fees
Typically a commission of 0.4% is charged for trading in gold ETFs and an annual storage
fee is charged. U.S. based transactions are a notable exception, where most brokers charge
only a small fraction of this commission rate. The annual expenses of the fund such as
storage, insurance, and management fees are charged by selling a small amount of gold
represented by each share, so the amount of gold in each share will gradually decline over
time. In some countries, gold ETFs represent a way to avoid the sales tax or the VAT which
would apply to physical gold coins and bars.

In the United States, sales of a gold ETF are treated as sales of the underlying commodity and
thus are taxed at the 28% capital gains rate for collectibles, rather than the rates applied to
equity securities.[5]

Physically backed funds

Central Fund of Canada and Central Gold Trust

The Central Fund of Canada (TSX: CEF.A, TSX: CEF.U, NYSE: CEF) and the Central Gold
Trust (TSX: GTU.UN, TSX: GTU.U, NYSE: GTU) are closed-end funds headquartered in
Calgary, Alberta, Canada, mandated to keep the bulk of their net assets in precious metals,
with a small percentage of cash. The Central Fund of Canada holds primarily a mix of gold
and silver, while the Central Gold Trust holds primarily gold.

The custodian of the precious metals assets of both funds is the main Calgary branch of
CIBC. Both funds are considered especially safe because of their published codes of
governance and ethics, the Central Fund's history of operation since 1961, and the funds'
simple prospectuses which equate shares of the closed-end funds with real units of ownership
in the trusts. As of October 2009, the Central Fund of Canada held 42.6 tonnes of gold and
2129.7 tonnes of silver in storage, and the Central Gold Trust held 13.6 tons of gold in
storage.

Claymore Gold Bullion ETF

In May 2009 Canadian-based Claymore Investments launched Claymore Gold Bullion ETF
(TSX: CGL). As of November 2010 the fund held 10.4 tonnes in gold assets.[6]

Exchange Traded Gold

Several associated gold ETF's are grouped under the name Exchange Traded Gold.[7] The
Exchange Traded Gold funds are sponsored by the World Gold Council, and as of June 2009
held 1,315.95 tonnes of gold in storage.[7] Exchange Traded Gold securities are listed on
multiple exchanges worldwide by various ETF providers, including:

SPDR Gold Shares

SPDR Gold Shares marketed by State Street Global Markets LLC, an affiliate of State Street
Global Advisors, accounts for over 80 percent of the gold within the Exchange Traded Gold
group. As of 2009, SPDR Gold Shares is the largest and most liquid gold ETF on the market,
and the second-largest exchange-traded fund (ETF) in the world.[8]

Stock market listings:

 United States (NYSE: GLD), Japan (TYO: 1326), Hong Kong (HKEX: 2840) and Singapore
(SGX:GLD 10US$)

The SPDR Gold Trust ETF (GLD) holds a proportion of its gold in allocated form in London
at HSBC, where it is audited twice a year by the company Inspectorate. GLD has been
criticized by Catherine Austin Fitts and Carolyn Betts for its extremely complex structure and
prospectus, possible conflict of interest in its relationships with HSBC and JPMorgan Chase
which are believed to have large short positions in gold, and overall lack of transparency.[9]
GLD has been compared with mortgage-backed securities and collateralized debt obligations.
[9]
These problems with SPDR Gold Trust are not necessarily unique to the fund, however as
the dominant gold ETF the fund has received the most extensive analysis.

[] Gold Bullion Securities, ETFS Physical Gold and ETFS Physical Swiss Gold

ETF Securities "Gold Bullion Securities" (previously marketed by Lyxor Asset Management)
listings:

 Australia (ASX: GOL), Belgium, France (Euronext: GBS), Germany (FWB: GG9B), Italy,

Netherlands and United Kingdom (LSE: GBS and LSE: GBSS)

Similar to Gold Bullion Securities, ETF Securities’ ETFS Physical Gold (LSE: PHAU) and
ETFS Physical Swiss Gold (LSE: SGBS) are also backed by allocated gold bullion. They
later launched ETFS Physical Swiss Gold Shares (NYSE: SGOL) and ETFS Physical Asian
Gold Shares (NYSE: AGOL) on the New York Stock Exchange for US investors seeking
geographical and custodian diversification.

ETF Securities’ physical gold ETCs — ETFS Physical Gold (PHAU), ETFS Physical Swiss
Gold (SGBS) and Gold Bullion Securities (GBS) — are all backed by “allocated” gold bars –
uniquely identifiable bars which carry no bank cr risk. The precious metal bars are held in
trust in London by the Custodian HSBC Bank USA N.A., the world’s leading Custodian for
ETCs. The metal held with the Custodian must conform to the rules for Good Delivery of the
London Bullion Market Association (LBMA). Securities are only issued once metal is
confirmed as being deposited into the Company’s bullion account with the Custodian.
Consistent with allocated gold, no precious metal is borrowed, loaned out nor does it earn any
income.[citation needed]
Dubai Gold Securities and NewGold

 Dubai Gold Securities (Sharia compliant) (NASDAQ Dubai:GOLD)

 ABSA "NewGold" debentures (JSE: NewGold)

Goldist ETF

Goldist ETF (ticker symbol: GLDTR) was launched by Finansbank in September 2006 on the
Istanbul Stock Exchange.[10]

iShares Gold Trust

The iShares Gold Trust was launched by iShares on 21 January 2005 and is listed on the New
York Stock Exchange (NYSE: IAU) and Toronto Stock Exchange (TSX: IGT). As of July
29, 2010, the fund claimed to hold 90.88 tonnes of gold in storage. According the prospectus,
trading in the fund may be suspended if COMEX gold trading is restricted or gold delivery is
not possible. Some writers have expressed doubts that iShares has sufficient gold inventory to
back its existing warehouse receipts.[11] One of the main differences between iShares and
SPDR Gold Trusts is that iShares creates roughly 100 shares from every ounce of gold,
versus the 10 shares per ounce created by SPDR. This makes iShares more accessible for day
traders or small investors to play the gold market.[12]

Julius Baer Physical Gold Fund

In October 2008 Swiss & Global Asset Management (formerly Julius Baer Asset
Management) launched JB Physical Gold Fund (SIX: JBGOCA, JBGOEA, JBGOUA,
JBGOGA) which invests in physical 12.5 kg gold bars (around 400 ounces). The ETF has
four unit classes traded in different currencies: CHF, EUR, USD and GBP.[13]

Precious Metals Bullion Trust

On August 14, 2009 Brompton Funds Management Limited launched Precious Metals
Bullion Trust (TSX: PBU.UN). The Fund invests in physical gold, silver and platinum
bullion bars which are stored on a fully allocated, insured and physically segregated basis in
Canada, in the treasury vaults of the Bank of Nova Scotia, a Canadian Schedule 1 bank.
PBU.UN publishes its “Good Delivery” standard bar holdings on a monthly basis on its
website[14] and units can be redeemed quarterly at Net Asset Value for cash with no
limitations. As the physical bullion held by the Fund is entirely unencumbered, unitholders
may also choose to redeem quarterly for whole bars of physical gold, silver and platinum
bullion (subject to minimum redemption amounts).

Sprott Physical Gold Trust

Sprott Asset Management launched the Sprott Physical Gold Trust as a closed-end fund on
February 26, 2010. It is traded on the NYSE Arca (NYSE: PHYS) and the Toronto Stock
Exchange (TSX: PHY.U). The fund holds physical gold, stored at the Royal Canadian Mint.
PHYS publishes its inventory of Good Delivery gold bars on the web, and (uniquely among
gold ETFs) allows shares to be redeemed for whole bars. As LBMA bars weigh between 350
and 430 troy ounces, physical redemption is limited to such increments. Regardless, the
provision for physical redemption lends credibility to the fund's claim of holding
unencumbered physical gold, especially as of 2010 when funds such as SPDR Gold Shares
with elaborately structured holdings are under scrutiny. As of June 2010, the Sprott Physical
Gold Trust held 582,417 ounces of gold, plus about $9 million of other assets.[15]

ZKB Gold ETF

The ZKB Gold ETF (SIX: ZGLD, ZGLDEU, ZGLDUS, ZGLDGB) was launched on 15
March 2006 by Zürcher Kantonalbank. The fund invests exclusively in physical 12.5 kg gold
bars (around 400 ounces). The ETF has four unit classes traded in different currencies: CHF,
EUR, USD and GBP.[16]

Certificate and bond products

db Physical Gold ETC

db Physical Gold ETC (SIX: XGLD, LSE: XGLD, FWB: XAD5) was launched by Deutsche

Bank in July 2010.[17]

Nomura Gold-Price-Linked ETF

On 10 August 2007, Nomura Asset Management launched the Gold-Price-Linked ETF (code
"1328") on the Osaka Securities Exchange, Japan. Shares are sold in 1 gram gold units, with
a minimum purchase of ten units. The fund is not backed by physical gold but by bonds
traded in London which are linked to the price of gold.

RBS Physical Gold ETC

Royal Bank of Scotland N.V. launched RBS Physical Gold ETC (FWB: XOB1) in April
2010.[18]

Xetra-Gold

Xetra-Gold (FWB: 4GLD) was launched by Deutsche Börse Commodities in December

2007.[19]

Source Physical Gold ETC

Source Physical Gold ETC (LSE: SGLD), provided by Source UK Services, aims to track the
performance of The London Gold Market PM Fix. Gold P-ETC is an exchange-traded
certificate rather than an exchange-traded fund. Each Gold P-ETC is a certificate which is
secured by gold bullion held in J.P. Morgan Chase Bank's London vaults.[20]

Hybrid products
Hybrid products hold mostly physical gold, but also hold other financial instruments such as
gold futures, bonds or money market funds.
Benchmark Gold BeES

On 19 March 2007 Benchmark Asset Management Company Private Ltd, a Mumbai-based

mutual fund house, launched Gold BeES (NSE: GOLDBEES) on the National Stock
Exchange of India. The name is short for "Gold Benchmark Exchange-traded Scheme."
Shares are sold in approximately 1 gram gold units. The scheme's assets are 90-100%
physical gold, and up to 10% money market instruments, securitised debts (up to 5%), and
bonds.[21]

UTI Gold Exchange Traded Fund

On 17 April 2007 UTI Mutual Fund listed Gold Exchange Traded Fund
(NSE: GOLDSHARE) on the National Stock Exchange of India. The fund states that its
objective is "to provide investment returns that, before expenses, closely correspond to the
performance and yield of the gold prices or gold related instruments."[22] Every unit of UTI
Gold Exchange Traded Fund approximately represents one gram of pure gold. Units allotted
under the scheme will be cred to investors’ demat accounts.

Index-tracking products
ETFS Gold

In September 2006 ETF Securities launched ETFS Gold (LSE: BULL) which tracks the DJ-
AIG Gold Sub-Index.

PowerShares DB Gold ETF and ETNs (PowerShares/Deutsche Bank)

Tracks the performance of certain index moves inside the Deutsche Bank Liquid Commodity
Index - Optimum Yield Gold [1]. ETNs are exchange-traded notes, which differ from
exchange-traded funds (ETFs).

 DB Gold (NYSE: DGL) (gold ETF)

 DB Gold Double Long (NYSE: DGP) (long leveraged gold ETN)
 DB Gold Short (NYSE: DGZ) (short gold ETN)
 DB Gold Double Short (NYSE: DZZ) (short leveraged gold ETN)

Gold held in ETF Securities Ltd.’s European exchange-traded products rose to a record $10
billion, accounting for half of the provider’s total global assets under management.

Its ETFS Physical Gold product held $5.2 billion of metal as of June 11, and ETFS Gold
Bullion Securities contained $4.8 billion, London-based ETF Securities said today in a report.
Total assets under management climbed to an all-time high $20 billion as of June 17
including commodity, currency and equity products, up 70 percent from last July, it said.
Gold ETP holdings advanced to an all-time high this year and coin sales from mints
accelerated on buying by investors seeking to protect their wealth from Europe’s sovereign-
debt crisis and on concern the global economic recovery may falter. Bullion climbed to a
record $1,265.30 an ounce on June 21 and is up 15 percent this year.

“European investors’ demand for hard assets, particularly precious metals, continues to grow
as they look to reduce their exposure to counterparty and currency-depreciation risks,” Hector
McNeil, a managing partner at ETF Securities, said in the report. “Demand for the ETFS
Physical Gold product has been particularly strong since the euro crisis began.”

Its two bullion products are the biggest gold-backed securities in Europe, ETF Securities said.
The company also provides precious-metals products in the U.S., Australia and Asia.

Global holdings of the metal in ETPs increased four metric tons to 2,062.6 tons on June 25,
according to Bloomberg data tracking 10 providers. Holdings in the U.S.-based SPDR Gold
Trust, the world’s biggest exchange-traded fund backed by bullion, were 1,316.18 tons on
June 25, valuing its assets at $52.28 billion.

Gold for immediate delivery traded at $1,259.15 an ounce at 11:17 a.m. in London and is up
15 percent this year. Prices are heading for a 10th straight annual increase, the longest run
since at least 1920.