Page 80

and sell high in high volumes to make large gains. Of course, just like any other type of investment, people can and do lose money when trading commodities. So commodities are items and materials (sometimes indispensable) used in large quantities by people everyday, without which our daily lives cannot continue as we know them today. This large demand for commodities has created a large financial market where traders can buy and sell commodities, or the paper representations of them, in an organized market. Such a market is referred to as the spot market, where the prices reflect the current going rate of the commodities.

You might have for example heard of the term “spot gold.” Spot gold is the going price of gold in the spot market, reflecting the price of gold on any given day.While the trades are done on paper (or its electronic version) certificates, they are in essence the same as trading real gold in the market, and the daily price fluctuates depending on the levels of supply and demand for gold in the world.

But there is yet another class of financial instruments derived from gold, known as gold futures (remember our discussion of derivatives). Gold futures reflect the price of gold at a certain time in future, for example three months, six months, or one year from now. There are many other commodities in the market and they all have their respective futures. All of them are traded in an organized market known as the futures market.

Futures

The futures market is an old and gigantic system of buyers and sellers who trade commodities and their respective futures. New York and Chicago are two of the most well known centers for trading futures. In the late 19th century New York and Chicago were the popular zones for …