Commodity prices come down to one timeless tug-of-war: supply versus demand for the physical material. But a few forces shape that balance in ways worth knowing.
Supply and demand set the price
Price settles where supply meets demand. The quirk with commodities is that both sides move slowly in the short run:
- You can’t open a new copper mine or plant an extra harvest overnight (supply is inelastic).
- People can’t quickly stop driving or eating (demand is inelastic).
So when the two fall out of balance, price does the adjusting — often violently. A 2% shortfall in supply can mean a 20% price jump, because that’s what it takes to ration demand. This is why commodities are famously volatile.
The other big levers
- The US dollar. Most commodities are priced in dollars worldwide. A stronger dollar makes them costlier for everyone else, softening demand and pushing prices down; a weaker dollar does the reverse. Gold is especially dollar-sensitive.
- Global growth. Industrial commodities — oil, copper — rise and fall with the world economy. Copper is nicknamed “Dr. Copper” for how well its price reads the pulse of growth.
- Inventories. How much is in storage versus consumed. Tight inventories leave no buffer, so shocks hit prices harder.
- Inflation expectations. Real assets often attract buyers when investors fear inflation, adding demand on top of the physical kind.
The commodity cycle
Commodities move in long boom-and-bust cycles, driven by the slow pace of supply:
- High prices reward producers, who invest in new capacity — but mines and wells take years.
- When that supply finally arrives, it often overshoots, gluts the market, and prices crash.
- Low prices choke off investment, supply tightens again, and the cycle restarts.
This lag between price signals and new supply is exactly why the cycle exists — and why timing commodities is so hard.
The takeaway
Commodity prices are set by supply and demand, but because both adjust slowly, small imbalances cause big swings. Watch the dollar, global growth, and inventories — and respect the long boom-bust cycle that the slow pace of new supply keeps turning.
This is education, not financial advice.