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A commodities price index is a measure of collective value of different commodities in a market. Commodities are physical goods that can be traded in various ways, where financial products and instruments have a value derived from the value of a physical commodity. Commodities include raw materials like foods, precious metals, energy materials, and many of the other goods that a nation produces.
The commodities price index tracks a variety of commodity prices with what is called a “fixed weight” method. Some experts might also call this a “weighted average.” The goal of the commodity price index is to provide an effective total value, or average value, that will help commodity investors make choices about purchases.
The values in a commodity price index can be based on current prices for commodities, called spot prices, or on specifically valued futures contracts. A futures contract for a commodity is an agreement to sell that commodity at a specific price on delivery at a future time. The popularity of commodity futures has led to a more complex and sophisticated commodities market, and the values on commodity price indices reflect the growth in complexity of that market.
As a tool for measuring the values of various commodities, a commodities price index can be based on a specific sector. Commodities in different sectors include energy commodities, agricultural commodities, or general value commodities. The index can help traders see how commodities are doing in a specific industry or region of the world.
Commodities indices show commodity values from different perspectives. Some, like the Standard & Poor’s commodity index, represent value tools from ratings agencies. Private commodity indices like the Goldman Sachs Commodity Index are managed by big players in the commodities market, and general financial markets as a whole.
Another way that a commodities price index can be used is in comparison to various index funds. Index funds are collections of values that are made to provide stable gains to an investor without some of the risks of narrower fund setups. Fund managers may use a commodity price index to track the progress of their own index fund.
The commodities price index should not be confused with the consumer price index, a U.S. measurement of various prices of goods that is used to measure inflation. The commodity price index is more general, and related to the global market for physical materials. Investors who are getting involved in commodities can use these index tools in many different ways to make decisions about what they buy and sell to pursue gains in a total investment portfolio.