Commodities

[James Boston]

I'm not well informed in this area, and was hoping someone could clarify. When investing in commodities, where does the money go? I know it's not like the stock market where you invest in a specific company. You're essentially investing in an industry. Where does your money go and who pays you when there is a positive return on your investment.
FWIW, I'm not thinking about buying any, so you don't have to explain why it's a bad idea (assuming you think it is). I just don't know how that market works.

[playerfl]

it depends on whether you are talking about the cash market or the futures market.

In the cash market, it is like buying anything wholesale. You just put up a bunch of money and get a standardized amount of stuff, like some barrels of oil.

In the futures market you are buying something for delivery in the future, but you don't have to give them the money up front, only a small deposit. So you could buy futures for 100oz of gold for delivery in september, but only put up enough money to buy 10oz. This gives you leverage, and if the price of gold goes up between now and september you get to keep the profit. Also with futures you don't have to actually take delivery of whatever you bought, you can simply sell the futures contract at a profit(or loss) on the exchange.

[James Boston]

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In the cash market, it is like buying anything wholesale. You just put up a bunch of money and get a standardized amount of stuff

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So you actually take possession of the good, and assume the responsibilty of finding a buyer and selling it?

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you can simply sell the futures contract at a profit(or loss) on the exchange.


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Do brokers generally handle this, or do you have to seek a buyer and sell the product, say cotton, to someone who is actually in the market for cotton?

I know these are probably stupid question, it's just something I've never given any thought to.

[playerfl]

in the cash market for gold for example, there is actually a bunch of gold in vaults. When you buy, they just put your name on it in the inventory list instead of the guy you bought it from. You can have it shipped to you if you want, like if you manufacture jewelry or sell gold bars at retail.

in the futures market you trade through a broker just like you would with stocks. individuals are usually just in it for the trading profits, so they never take delivery, although you can if you want to.

[goldcowboy]

It goes to the person on the other end of the transaction. If you buy a contract for 5000 bu. of corn to be delivered in September, the margin money goes to the person who sold that contract. Then, sometime prior to contract expiration, you must sell that contract or someone is going to show up at your doorstep with 5000 bu. of corn and demand full payment at the contract price. Obviously, you buy a contract when you think the market is going higher hoping you will be able to re-sell at a lower price and thereby make money on the difference. Conversely, you can sell a contract on 5000 bu. of corn for September delivery (even if you don't own any corn) if you think the price is headed south. In any event you will be forced to repurchase your contract prior to expiration or buy 5000 bu. on the cash market to be able to meet your delivery obligation. Hardly anyone bothers with physical delivery; it is just too costly and bothersome.

All the commodity markets work this way. You can buy or sell cattle, crude oil, gold, plywood, coffee, etc. on any business day, and the game is open to the world, whether you actually are involved in the industry or not.

P.S. This is an excellent way to lose your shorts!

[RollaJ]

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you must sell that contract or someone is going to show up at your doorstep with 5000 bu. of corn and demand full payment at the contract price

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Im sure you know this, but to clarify you have to go pick it up yourself, otherwise it would make for a great $13,000 prank!!

Index futures settle cash. Most currencies settle for actual delivery of the foreign currency