Commodity Investment Strategy: Samvat 2070

While investing in commodities futures, an investor primarily considers the margin requirements, liquidity of contracts and availability of market information. Global commodities like bullion, energy and base metals are having similar international counterparts; hence liquidity in these commodities would be very high. Agricultural futures on the other hand are comparatively less liquid with a relatively high margin requirement. Be self prepared with adequate knowledge about the commodity before you invest says CP Krishnan, Whole Time Director, Geojit Comtrade

Globally, commodities have been going through a very rough patch for the last few months. Reports of surplus stocks, feeble demand from the top consumers and stronger global equities weighed down the prices. However, looking ahead, as demand of essential commodities is persistent in nature its outlook might be prospective. Prices of global commodities like bullion, crude oil and copper look firm and expect to continue with their positive momentum, whereas in case of agricultural commodities the outlook seems bleak except for oil seeds, spices and maize. 

Bullion 

Bullion witnessed an extreme upsurge earlier with gold on MCX posting its record high of Rs 35074 per ten grams in August due to a weak domestic rupee. Taking cues from gold, silver prices too rushed in the period. However, prices of gold held steady in the overseas markets with a mild positive bias. Looking ahead, gold and silver would remain the key commodities to invest in for a reasonable return. The factors favoring bullion are weak domestic currency, geopolitical tensions, support from the financial turmoil in emerging countries, anticipation of central bank buying, expectations of continuation of prevailing US bullion friendly bond buying scheme and possibilities of improved physical buying from the top consumers like India and China. 

Compared to the same period last year, the INR is currently trading weak by over 18 per cent and it is unlikely that it is headed for a major recovery. A weak rupee always supports commodity prices domestically. Since India is the top importer of gold, the landing cost of the commodity would be a central point while determining local prices. A weak currency always lifts up the landing cost of bullion that leads to skyrocketing prices in the domestic market. Cues from the geopolitical tensions around the globe might be taken by speculators and investors. Usually, inflation fears in an economy prompt investors to invest in the yellow metal. Economic developments in the emerging countries are another supportive factor for bullion. Anyhow, uncertain economic conditions probably direct buyers to rush into safe haven investments.  

Expectation prevails that institutional investors will be active in the bullion market and support prices. Worries over major selling in the overseas market piloted traders and investors to sell out their physical gold earlier but conditions are now favourable as recent reports reveal that investment firms are bullish on gold. A forecast of a rise in physical demand from the world’s top consumers, India and China is also lifting the sentiments. Domestic gold traders in the country foresee high physical demand in the coming period due to a good monsoon as that could lead to high surplus rural income in the economy. Usually, high rural income elevates the demand for gold in India. Persistent marriage based demand and festive demand may also prop up the sentiments. On the international front, as long as the US Federal Reserve maintains its bullion friendly USD 85 billion monthly bond buying stimulus package, spot gold in the international market will stay firm. But a withdrawal of the stimulus would have a negative impact on the bullion market. 

Energy 

Oil prices around the globe may remain positive as major global economies are signaling a positive growth, which could lift the demand for the commodity. Worries over geopolitical issues in the Middle East are likely to escalate concerns of supply tightness in the market. A shrinking US crude inventory level may possibly support the prices to move north. In the domestic market a weak currency is likely to provide an extra cushion to the prices. The INR hit an all time low of Rs 68.80 versus the dollar in the last week of August and took the commodity’s price to a multi month high. 

Base metals

Reports of redundant supply and sluggish global economic recovery saw copper trade fragile in overseas markets during this year. But on the domestic front it has been remarkably choppy as a feeble currency made its direction erratic. Taking cues from the red metal, other base metals too followed suit. However looking ahead, copper is likely to trade with a positive sentiment due to the China impact.  

China is the top consumer of copper accounting for 40 per cent of the world’s total consumption. As the country consumes hefty volumes of global base metals, developments in that economy and industrial growth there would be a prime factor for determining global base metal prices. The current developments in China are favoring a strong demand outlook as the state led urbanization projects have been set as a priority sector for growth by the new Chinese leadership. As per industry sources, China is expected to import more copper in 2014 as the country steps up building of power networks, rail lines and low-cost homes. The recent economic releases from the country too are seen encouraging the metal industry with the Chinese factory output hitting a 17 month high in August. Similarly, retail sales have grown at the fastest pace this year and power production has soared during the month of August.

Aluminium prices may gain with more building activity. China is anticipated to boost the demand of the commodity to tackle their enduring overcapacity in the industry. An approval of series of rail projects may enhance demand from the transport equipment makers. A recovery in the US and European economies provides firm support to prices as well. Earlier, expectations of moderate China growth outlook, weakening optimism over business growth and struggling economic situations of European countries influenced base metal prices broadly. At the same time, burgeoning inventories in the exchange warehouses may influence the investor confidence and reflect on prices later.   

Agricultural complex 

It has been a good monsoon this period, but the prices of a few commodities are likely to edge higher due to strong fundamentals. In the spice complex, pepper and Dhaniya prices are likely to trade firm owing to a strong international demand. Cotton and maize are the other agricultural commodities expected to gain in the coming season. However, the oil seed complex might be the top gainer. Soybean, Soy oil and Crude palm oil would come first in the list. Increased usage of US soyoil for biodiesel fuel along with the demand from the food sector perhaps supports prices in the overseas market. On the domestic front, a probable rise in import duty on refined edible oil to 10 per cent from the current 7.5 per cent with a view to support the local oil refining industry is likely to shore up Indian prices later.  

While investing in commodities futures, an investor primarily considers the margin requirements, liquidity of contracts and availability of market information. Global commodities like bullion, energy and base metals are having similar international counterparts; hence liquidity in these commodities would be very high. As against global commodities, agricultural futures are comparatively less liquid with a relatively high margin requirement. In case of a beginner in commodity markets, he/she should be self prepared with adequate knowledge about the commodity. Always take your own decisions but seeking expert advice would help you to enhance profits or reduce risks. Knowledge about the market regulators and various market participants would be an added advantage.