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The Commodities Index

Every financial market has an index (or a benchmark) through which its health and progress can be measured. In its simplest form, a gauge or index can be arrived at by proportionally averaging the entire value of a market's instruments on a daily basis. Using this index over time (in table, chart, or other formats), the public can get a feel for the historical and current performance of the overall market. While the mentioned index is a valid gauge, many other varieties can exist, and the ones most accepted by the public become the predominant indices for a given market. In the bond market, which was covered in the previous chapter, the long bond and the 10-year note have become the benchmarks used to gauge the overall health of the bond market. No doubt most of you are familiar with the Dow Jones Industrial Average index (DJIA), which is used for the stock market (to be covered in the next chapter). In the case of commodities market, the most well known index is the Commodity Research Bureau (CRB) index (produced by Bridge Information Systems). The CRB index is arrived at by using a special formula for averaging current and forward prices of 17 commodities which include corn, silver, coffee, and crude oil. The CRB index is used as a benchmark for commodities, but not their futures. It also does not include any financial instruments such as bonds and equity indices, so it is not necessarily a good futures market gauge. But the CRB index, which is strictly a commodities index, can be used in conjunction with other indices (such as stock indices) to get a general idea about the health of the futures market, which is largely based on commodities and financial indices.

Commodity Pools

For many of us who may feel uncomfortable trading futures directly, there is an alternative called a commodity pool. A commodity pool is …