For many investors, an analysis for oil or gold isn't just important, it's essential. If you want to make a real difference in your investing, whether you're starting with small investments or heading towards the end of a traditional investment plan, you need to find out as much as you can about commodity markets. In order to do this, though, you need to understand the basics of these markets.
At its heart, an analysis for oil or gold is really just a simple comparison of supply and demand. Supply and demand are just two terms used to describe the behavior of the prices of different commodities over time. There are several underlying factors that go into the price of oil and many that go into the price of gold. Before you can understand how to analyze for metals, you need to understand what goes into the price of both oil and gold.
Let's start with supply. When we think about supply, we usually refer to what's called "frictional oil." This refers to oil that has to be transported and stored by oil tankers. The kind of supply is one factor that determines the price of oil, since tankers carrying the oil have to make daily trips. It's a good idea to know about this kind of supply because it can play a large role in determining the price of oil over time.
On the other hand, demand is another factor that plays a role in an analysis for gold or oil. Demand is basically the buying and selling of commodities. For example, in the case of oil, the demand is for the product, not the product itself.
Demand, then, includes everything from the amount of oil bought by a company to the number of cars purchased. It can also refer to how much demand there is for something in particular, such as the number of vehicles in the country that drive gas-powered cars. Demand has a large effect on the price of oil and gold as well.
A third factor that influences the price of oil and gold is price. During a period of demand, the supply of the commodity increases. That is, the supply of oil and gold can increase. That means that there is more oil available for buyers to buy.
However, in a period of supply, the demand for oil or gold is low. In fact, in some cases, the demand for these commodities is at its lowest point in the last few years. In such circumstances, oil and gold prices are likely to fall.
Price is a factor that affects the supply and demand of commodities. On the supply side, the price is a consideration when calculating the quantity of supply available. In the case of oil, the price of oil is based on the prevailing price of crude oil, which itself is determined by many factors. As well, when oil becomes scarce, as in the case of Iraq, the price of oil rises.
The most obvious reason for the price of oil to rise is that there is a shortage of supply. That shortage then increases the demand for oil so that it is purchased at a higher price. Prices, therefore, tend to be high in times of supply problems and low in times of supply problems.
On the demand side, the price is the same as supply. As oil prices rise, the amount of demand for it is affected, so there is more supply available for buyers. Prices will therefore be lower than they otherwise would be.
Not all analysts are concerned with the supply and demand of oil. Some prefer to look at the supply and demand of other commodities such as energy, metals, and currencies. In addition, some consider the demand and supply of commodities to be relative, that is, to be relative to the currency that is the medium of exchange.
In other words, an analysis for oil or gold is really a simple comparison of the value of one commodity against another, such as oil against gold. In the same way, you might compare, say, currency against gold. But there are also other ways to analyze, for example, metals against gold, and energy, as well as metals and commodities against currencies.