6.1. Fundamental Analysis

In short, fundamental analysis is the use of economic data to forecast market prices. Specifically, it examines the factors that impact the production (supply) and consumption (demand) of a commodity. A rise or fall in personal income, for example, influences consumers’ willingness to buy a commodity, while changes in production costs influence a producer’s willingness to sell it. A trader using fundamental analysis applies supply and demand information to predict changes in a commodity’s price.

A product’s demand reflects society’s willingness to purchase a product at any given price. Typically, a product’s demand decreases as its price rises. A product’s supply refers to the amount of a product that producers will make available for sale at any given price. The supply of a product tends to increase with rising prices, as producers seek to profit from rising prices.

The market price for any product tends to stabilize where demand and supply are equal (see diagram below). If supply exceeds demand, suppliers must lower their prices so that excess inventories can be sold. If low prices create high consumer demand but discourage production