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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Commodity Index

What it is:

A commodity index is an index of the prices of items such as wheat, corn, soybeans, coffee, sugar, cocoa, hogs, cotton, cattle, oil, natural gas, aluminum, copper, lead, nickel, zinc, gold and silver.

How it works (Example):

The Goldman Sachs Commodity Index (GSCI) is one of the most popular commodities indexes. Owned by Standard & Poor’s, the GSCI is weighted according to the global production levels of a variety of commodities. All of the commodities in the index are physical commodities; no financial commodities are allowed. (There are commodity indexes exclusively for financial commodities.)

The index was is normalized to a value of 100 on January 2, 1970, in order to permit comparisons of commodities prices over time. To ensure continuity, sometimes the index adjusts via a "normalizing constant" when the weights of the underlying commodities change. The value of the GSCI on each business day is therefore equal to the total dollar weight of the GSCI divided by the normalizing constant.

Why it Matters:

Commodities are raw materials used by virtually everyone. The orange juice on your breakfast table, the gas in your car, the meat on your dinner plate and the cotton in your shirt all probably interacted with a commodities exchange at one point. Commodities-exchange prices set or at least influence the prices of many goods used by companies and individuals around the globe. Changes in commodity prices can affect entire segments of an economy, and these changes can in turn spur political action (in the form of subsidies, tax changes or other policy shifts) and social action (in the form of substitution, innovation or other supply-and-demand activity). A commodities index is one way to track the changes in the prices of these important items.

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