CommodityDerivativeZ

Gold::Questions & Answers!!

2009-02-21T07:05:00.000-08:00

Courtsey:Larry Edelson

It's time again for me to answer some questions my readers have. Often, this kind of forum can cut right to the chase, as I directly respond to the most popular questions I'm hearing. So let's get right to them ...

Bob writes in: "Gold's broken above your key resistance level of $929. How much higher can it go, and how fast do you expect it to go up?"

You'll see some backing and filling of the support areas just under $929, meaning you shouldn't be surprised if there's yet another pullback. But gold's next leg up should easily exceed the prior record high of $1,034 an ounce.

Once that is accomplished, expect another pullback, then a move up to at least $1,250.
Longer-term, over the next three years, I expect to see gold reach at least $2,200 an ounce, and possibly much higher. Select gold mining shares and mutual funds should perform even better.

Neal asks me: "Do you still think the Dow bottomed last November?"

Darn good question! Yes, and no. In nominal figures, the November 20 low is still holding. While in real terms, a slight new low has formed. On the other hand, many indicators I watch — such as the advance/decline line, also indicate the November 20 low was THE low.

However, there's clearly too much nervousness and volatility in the markets right now to say with any certainty. I do expect the following though: One more selling panic in the Dow that could bring it down to the 7,000 level. Then, a quick turnaround followed by a multi-month rally that could easily take the Dow back over 10,000.

So unless you are a very short-term trader, or have guidance in that area, I would NOT be playing the short side of the stock market here, either for speculation, or as hedges.

Rona writes in: "Larry, the dollar seems to be defying gravity. What gives?"

On the surface, it looks like the dollar is strong. But stand back for a minute and consider the following: The British pound and the euro are plummeting. So is the Russian ruble and all Eastern European currencies.

Add in all the dollar-denominated debts that are being liquidated and paid off, and the dollar should actually be soaring. But it's not. The Dollar Index is a mere 16% above its record low set last year.

On a relative performance basis, that's terrible upside action in the buck. And it's a sign of what's to come. There's not one shred of doubt in my mind that the dollar is headed much, much lower.

Either forced lower by the marketplace, which is fully aware of the trillions in fiat money that must be printed, or by authorities who have the legal means to change and depreciate the value of the dollar to alleviate the deflationary impact of the mountain of debt out there.

Note: Some say Europe is in much worse shape than the U.S., and in some respects, that's true. But Europe is NOT expected to save the world, the U.S. is.

Couple that with the fact that most of the world lays the blame for this crisis on the U.S. and you have a geo-political situation that squarely puts U.S. authorities on the hot seat, under pressure to devalue.

Moreover, since a global economic recovery depends on a recovery in the U.S. — it actually behooves U.S. authorities to devalue the buck. By doing so, they can ...

1. Stimulate U.S. exports
2. Re-ignite inflation and rising prices, both domestically and internationally.

This is exactly what President Roosevelt did in 1933 when he confiscated gold, raised its price, and devalued the dollar. Almost immediately, the economy began to recover, employment picked up, and both prices and wages started rising.

David asks me: "I saw a report you wrote last month indicating that the price of oil had bottomed. But since then, oil has fallen further. You were wrong. You're probably wrong on deflation too. No?"

My cycle work relates only to timing and not price. When I say something or show a chart that indicates cycles are bottoming, it merely indicates that selling pressure is slowing. And conversely, if I say cycles are topping, it means we're entering a time period where buying pressure should be exhausting itself.

Cycle analysis can be very helpful as a technical tool, but only if one keeps in mind that it relates to timing, and not actual price. Other indicators should be used to determine whether the price action is consistent with the cycle models.

In the case of oil, although its price has fallen further, we remain in a time window where we should see downside pressure reduced, and an eventual turn back up.

Barbara wants to know: "Are there any life insurance policies or annuities that allow you to hold gold?"

None that I know of in this country; however, there are some excellent programs based in Switzerland. You might consider looking at what the SafeWealth Group offers.

Dick asks: "Larry, what are your latest thoughts on Asia?"

I'm in Asia now. There are pockets in Asia that are certainly slowing. But for the record, I will say this: The slowdown occurring in Asia is nowhere near as bad as the western press is leading you to believe.

Here in Bangkok, construction of new office and condo buildings continues almost unabated. Shoppers pack the malls at Paragon and Emporium. In Singapore, where I was last month, there are as many construction cranes peppered around the city as ever. And the world famous Orchard shopping district is practically elbow to elbow with people.

In my opinion, western analysts are most notably wrong about China. Yes, thousands of factories have shut down in China. But those western analysts totally underestimate the Chinese and their ability to handle hard times, as well as their extremely proud heritage and nationalism.

Not to mention the fact that the Chinese banking system is now the strongest in the world ... and that Beijing now has almost $2 trillion in cash on hand and hardly any foreign debt.

There is no doubt in my mind that China is going to turn back to the upside, even before the U.S.

Richard writes in: "Other analysts I read tell me the U.S. doesn't have any gold reserves; that Washington secretly dumped them decades ago and that Fort Knox is empty. Is there any truth to those statements?"

The U.S. Treasury has 261 million ounces of gold worth about $245.3 billion at gold's current price.

A large part of it is still held at Fort Knox, but not exclusively, as in the past. Today most of the gold is actually stored 50 feet below sea level in a subterranean vault under the Federal Reserve Bank of New York at 33 Liberty Street, Manhattan.

Sally's question: "You recommend up to 25% of investable funds be allocated to various gold investments, with the balance, 75%, in cash. But why so much cash when it's only going to lose purchasing power over time?"

Excellent question Sally. I do so for one main reason: Everyone needs liquid cash in this environment. And over the short-term, cash — in the form of Treasury bills with a maturity of less than one year, or a Treasury-only money market fund — is the best way to go.

Later, when I see the real collapse in the dollar beginning, I will likely recommend moving out of cash and into select investments that will benefit from the next big leg down in the dollar.

Steve wants to know: "You've talked about the central bankers of the world changing the value of money. But how could they do that?"

They've done it numerous times before. They did it in 1933, in 1944, in 1971, and in 1995 at the Plaza Accord. Governments and central banks have the ability to tinker with exchange rates between currencies and the value of gold to create new valuations for paper money. They can do it by manipulating the markets, or, in extreme cases, by emergency rule.

It is likely to happen again, and sooner rather than later. If authorities amongst the G-20 do not see signs of a turnaround soon, I believe they will start looking further into a new monetary system that will re-align the world's debtors, mainly the U.S., and the creditors. I expect this to be an ongoing effort and a major topic of the upcoming G-20 meeting on April 20.

I further suspect that a few years from now the world will largely be comprised of three currencies: The dollar, the euro, and a new regional currency for all of Asia

Gold:: Is it an Investment Oppurtunity now?

2009-02-19T23:50:00.000-08:00

Courtsey:Dr.Krishna
I am writing this article on Gold after receiving many enquiries from investors on "Gold as new investment opportunity". Gold is now trading around Rs 15,650 per 10 gram. Gold now suddenly caught the attention of herd investors when value investors are selling their holdings. Another classic Herd Mentality (Reliance Power IPO) is now on the cards.

Gold was traded below Rs 12,000 levels per 10 gram for more than 1 year but no investor asked me about gold as investment. Now Gold is trading in the above 15,500 zone but people are now asking me about investment opportunities in the gold and my opinion on the target of 30,000 levels. This incident once again illustrated the "Herd mentality" of investors. These people will never learn in their life about the "value of investment" and "Margin of safety".

Not many people talked about Sensex and stock markets when it was traded below 14,000 till September, 2007. When Sensex crossed the levels of 18,000, many people started investments in the stocks on the hopes 30,000 Sensex levels. Sensex deceived investors by reaching 21,000 levels and everyone knew the rest of the story.

History of Gold as investment:

Gold is traditionally treated as safe investment in the difficult times. Big investors will treat this as "Safe Hedge" when equities are not yielding good returns and when dollar is weak. Same thing happened in 2003 when equities are in down turn for 3 consecutive years. These people will sell their hedge holdings like Gold and FMCG stocks once equities make bounce back. But Gold is safe hedge against inflation.

History of gold prices (in rupees):

1930: 180 per 10 gram
1940: 360 per 10 gram
1950: 1000 per 10 gram
1960: 1110 per 10 gram

1970: 1840 per 10 gram
1975: 5,400 per 10 gram

2000: 3,000 per 10 gram
2006: 5,400 per 10 gram

2009: 15,700 per 10 gram.

Gold surprisingly gave 300% returns from 1970 to 1975 when world suffered worst ever recession after great Depression. Will the history repeat? That is the reason behind current "Mad Gold rush". But if you invested in the Gold in 1975, your investment gave negative returns for the next 25 years.

Remember 2 things:

1. Gold generally trades in the lower range around March and July. Generally, it is the best time to buy gold and marriage season is the best time to sell God.

2. Below 11,000, Gold is a safe investment but above 15,000- it is only for traders but not for investors.

Future of Gold:
When stock markets are in down turn in 2002, Gold was at Rs 5,400 per 10 gram. Don't forget that Gold traded below 9,000 per 10 gram till 2007 means you might have got routine returns from Gold investment. But investors who made investments in gold in mid-2007 are now making 70% returns in just 20 months. But I don't know what will happen to gold investors who bought it at above 15,000 but they remain in losses even after 3 years. Why? Gold will recede to 11,000 levels once equities make comeback. What happened to crude oil will repeat in case of gold also. Don't forget that Gold is not even an essential commodity. But Gold is a less volatile investment.

Examples:

1. Crude oil prices moved to $147 per barrel and Goldman Sachs people gave $200 per barrel target. It is now trading below the fundamental price at $35 per barrel.

2. Sensex moved to 21,000 and analysts and analysts gave 30,000 target. It is now trading at 9,000 levels.

3. Real Estate prices reached astronomical levels in 2007 but people bought land as if there will be no land available for purchase in future.

Interesting analysis from Zaverat:

If you invested 10,000 in various investments in the early 1999, following are the yields by 2004.

1. Fixed Deposit: 13,794.

2. PPF: 16,025

3. Gold: 15,064

4. BSE Sensex: 20,769. Equities saw the worst bear market in this time zone but gave good returns. 10,000 invested in Sensex is still 10,000 by 2002 but 20,000 by 2004.

Gold may deceive investors for some more time but investors should ask themselves some basic investment questions before making fresh investments.

1. "What is the fundamental value of the investment whether it is a share, real estate or commodities like gold?"

2. Whether the price already included the good news or not?

3. Why analysts are giving bullish estimates? Is there any truth?

4. Are there any better value based investment opportunities?

5. What are the historical moments of that investment?

6. Are we late in joining the party?

7. What is the margin of safety at current price?

My estimate on Gold:

I don't know what will happen to the Gold in the next few days due to these "Herd investments". But Gold will trade below 12,000 levels even after 3 years. What it means that you will not get a single rupee from Gold investments at current valuations if you are a long term investor. If you are a trader, enjoy the mania. Young investors should allocate 5-10% of your portfolio to Gold and buy at reasonable prices.

Article on Gold From 4Ps:

4Ps magazine published an article on "How to plan investments for 2009-10?". Magazine published articles on various investment options like Stocks, Commodities, Gold, Real Estate and Currency.

Highlights of the article:

Warren Buffett: Gold is the most useless commoditiy.

Stat: Rs 100 invested in Gold in 1979 is Rs 400 in 2009.

Gold's fate linked to dollar movement - The Hindu

2008-12-21T21:42:00.000-08:00

Courtsey: G.Chandrasekhar, The Hindu

Mumbai, Dec 21 Even 2008 draws to a close, it is becoming increasingly clear that all commodities market participants - traders, investors and others – will remember the year for the extraordinary price performance, gyrations and volatility.

Commodity prices - be they of energy, metals or agriculture - not only hit multi-year record highs at one time, but they also plunged to great depths in a matter of weeks, if not days, precipitating a crisis.

Quite contrary to the first two quarters, in the last quarter, producers, consumers, traders and investors faced daunting challenges in the wake of sharply declining demand, rising inventory and collapsing prices.

Speculators exited the market in a hurry, removing a considerable amount of speculative froth that had developed in many commodities during the bull-run.

What started as global slowdown degenerated into a recession, at least in industrial economies such as the US and the Eurozone. Financial and economic conditions have turned grim. Currency fluctuations, especially that of the dollar, impacted market prices.

There is a widespread expectation that notwithstanding continuing recessionary conditions, commodity prices may largely be bottoming out. From the current levels, further downside risk to prices - crude, base metals, agriculture - seems to be limited. The crisis of confidence continues and may stay for some time.

However, when the process of economic recovery begins, hopefully in the third quarter of 2009 as a result of a series of bailout and stimulus packages, investor confidence may return to the market. Until then of course one must reckon with volatility.

There is also the strong possibility that sizeable output cuts that have been made in crude, steel, copper, aluminium and others will store problems for the future and begin to create a supply bottleneck when demand returns.

However, for the time being cash is still king and poor demand outlook remains the top of market concerns.

Gold
With the dollar rapidly weakening against the euro last week, gold prices got a boost and decisively moved above $800 an ounce. Physical demand at lower levels amid less volatile conditions generated support.

On Friday, in the London spot market gold PM Fix was at $835.75/oz, down from the previous days $855.25/oz. Silver declined too to $10.61/oz (AM Fix) from $11.29/oz the previous days.

Going forward, the yellow metal will be clearly influenced by the strength or weakness of the greenback. If the dollar should weaken further, it should provide a strong base for the metal to move higher. However, foreign exchange experts are of the opinion that currency movements in the next few weeks may cushion gold’s upside.

Interestingly, as the prices ruled above $800/oz, many investors exited their long positions on the Comex. No wonder, net fund length is near the lows of June 2007.

According to technical analysts, gold’s uptrend is erratic. It may be tough for the metal to breach $880 levels. The market is holding above short-term support of $829.

Below $829 would warn of a deeper pullback towards $782, though even in this scenario the choppy uptrend from October lows is likely to remain dominant force. The medium term view is largely neutral within $700-930.

Base metals
After sliding to fresh lows, base metals prices rallied on news that the US government will give an emergency loan of $17 billion to the US car manufacturers. Other wise, it was terrible week for base metals, with the exception of aluminium and zinc which ended the week higher. Lead prices fell by over 16 per cent week-on-week and tin fell by over 10 per cent.

Outlook for the base metals complex over 2-3 quarters into next year is grim with recessionary conditions and lack of demand growth the main theme. Construction sector and automobile sector, two important metals consuming sectors are facing serious downturn in demand. Inventories are rising. Many producers have responded quickly with output cuts.

Copper is the metal with the largest downside potential from current levels. Copper prices are is still above production costs and miners are still making money. So, there could be further cost-related cutbacks, experts assert.

On the other hand, aluminium, nickel and zinc prices have all fallen very close to weighted average production costs, experts point out, adding copper could dip near to this level at $2,100 a tonne.

Notwithstanding short-term weakness, the longer term outlook for base metals appears positive. This is because not only is output being cut, new investments are being put on hold. This will squeeze supplies when demand returns to the market. There will be supply constraints with concomitant impact on market prices.

Crude
Despite announcement of OPEC production cut and drastic decisions in the US monetary policy, crude prices dipped below the psychological $40 a barrel. Demand side concerns have been top of the markets mind. There are as yet no signs of demand revival. The financial crisis and growth concerns may continue for longer time than imagined earlier.

Experts, however, believe, from the current levels, the downside risk to crude prices is limited. Indeed, they are talking about the possibility of over-tightening of the market in the medium term. The supply performance of non-OPEC sources is being closely watched.

Oil @ 30 BBL by March 2009 - Goldman Sachs!!

2008-12-18T01:12:00.000-08:00

The continued deterioration in global oil demand has compelled us to again lower our oil price outlook for 2009 to an average of $45/bbl from $75/bbl previously, though we see a growing number of signs that oil markets have entered the bottoming phase of the cycle.

Despite our lowered oil price deck, this is not a call that we are incrementally more bearish on Energy equities. Our global energy team is, however, continuing to stick to a defensive posture within the Energy sector in terms of our top picks, though we have gained comfort in recommending select higher-beta stocks that we might call “offensive defensive” ideas (primarily hedged E&Ps with transformational growth opportunities).

We think a move back to high-beta names that would benefit from a future rally in oil prices is still several months away, pending greater confidence that demand is no longer deteriorating and supply is on-track to decline sharply. The latter we think requires a longer period of oil around $40/bbl (or lower) than we have currently seen; demand globally also shows no signs of improving.

We think that the sharp and sudden collapse in global oil demand exceeds OPEC’s ability to, on its own, balance markets, and necessitates sharply lower non-OPEC crude oil supply.

Unlike OPEC, we believe non-OPEC producers will reduce production and sharply cut capital spending only if cash flow is sufficiently weak, which we believe is the case at oil prices in the $40-$50/bbl range.

However, because there is a lag between capital spending cuts and evidence of lower production—and demand is incredibly weak right now—oil prices may need to fall further to levels that stimulate non-OPEC producers to accelerate activity declines and possibly even shut in production, which we think will occur at oil prices around $30/bbl.

While global oil demand is very weak and the duration of demand weakness is unclear at this time, we believe oil supply will collapse if prices remain below $40/bbl for an extended period of time (6-12 months or longer) suggesting we are likely to have entered the bottoming phase of the cycle.

• Oil prices are now meaningfully below the $60/bbl level at which the average company earns a cost-of-capital return on longterm investments based on current costs; capital spending reductions have begun.

Oil prices have traded near the $40/bbl level below which we think short-cycle activity will be sharply curtailed, which should accelerate near-term declines in supply.

• Industry returns on capital are near historic trough levels at a $45/bbl WTI oil price.

• The WTI forward curve is in “super contango” that historically has coincided with the weakest portion of the cycle.

What is not clear yet is how long the bottoming phase will last. Global economic conditions are the weakest the world has seen since at least the early 1980s and global oil demand is declining at an accelerating rate. In our view, the duration and depth of the downturn will be decided by the interplay of global oil demand weakness and non-OPEC supply declines.

Global oil demand has weakened to the point that OPEC cuts alone are unlikely to return the market to balance, with greater declines in non- OPEC supply now required.

In terms of gaining confidence that a bottom is at hand and a recovery possible, we would need to see the following:

• Demand: A deceleration in the rate of global oil demand declines is critical (no signs yet).

• Non-OPEC supply: A sharp reduction in short- and long-term capital projects is required (early signs emerging).

• OPEC supply: It will be important for OPEC to announce additional cuts at its December 17, 2008 meeting in Oran, Algeria in order to gain confidence that OPEC’s “Big 3” of Saudi Arabia, Kuwait, and UAE are on-track to reduce production by the 2 mn bbls per day.

Gold as an Investment alternative!!

2008-11-18T05:39:00.000-08:00

Gold has got lot of emotional value than monetary value in India. India is the largest consumer of gold in the world. In western countries, you can find most of their gold in their central banks. But in India, we use gold mainly as jewels. If you look at gold in a business sense, you will understand that gold is one of the all time best investment tool. My dear readers, today I would like to discuss on investments in gold and its potential.

I don،¦t think that I need to give you the definition of gold, because everyone is familiar with gold and in India almost everyone use gold in their daily life. Gold is one of the safest and low risk investment tools in the world and obviously in India also. Gold can be readily bought or sold 24 hours a day, in large denominations and at narrow spreads. This cannot be said of most other investments, including stocks of the world،¦s largest corporations. Gold proved to be the most effective means of raising cash during the 1987 stock market crash, and again during the 1997/98 Asian debt crisis. So holding a portion of portfolio in gold can be invaluable in moments when cash is essential, whether for margin calls or other needs.

Recent independent studies have revealed that traditional diversifiers often fall during times of market stress or instability. On these occasions, most asset classes (including traditional diversifiers such as bonds and alternative assets) all move together in the same direction. There is no ،§cushioning،¨ effect of a diversified portfolio ،X leaving investors disappointed. However, a small allocation of gold has been proven to significantly improve the consistency of portfolio performance, during both stable and unstable financial periods. Greater consistency of performance leads to a desirable outcome ،X an investor whose expectations are met.

Indian Gold Market Current Scenario:
Size of the Gold Economy: more than Rs. 30,000 crores
Number of gold jewelry manufacturing units: 1,00,000
Number of people employed: 5,00,000
Gems & Jewellery constitute 25% of India،¦s exports about 10% of our import bill constitute gold import.
Number of banks allowed importing gold: 15 (While recently this has been liberalized, detailed notification is awaited)
Official estimates of the stock of gold in India: 9,000 tons
Unofficial estimates of the stock of gold in India: 12,000 ،V 14,000 tons
Gold held by the Reserve Bank of India: 358 tons
Gold production in India: 2 tons per annum.

Demand for gold in the Indian Market:
India has the highest demand for gold in the world and more than 90% of this gold is acquired in the form of jewellery. Following are the factors influencing the demand for gold.

„« The movement of gold prices is one of the important variables determining demand for gold.
„« The increase in the irrigation, technological change in agriculture (through mechanization and high yielding varieties), have generated large marketable surplus and a highly skewed rural income distribution is another factors contributing to additional demand for gold.
„« Black money originating in the services sector, like real estate and public sector, has contributed to gold as store of value. Hence income generated in these service sectors can be treated as a determining variable
„« Since bank deposits, unit trust of India, Mutual funds, small savings, etc are alternative avenues for investing savings, the weighted return on these alternative assets can be considered as another influencing factors.
„« Demand for gold also depends upon prices of other commodities. When there is an increase in general price level, it has two effects: first it reduces the purchasing power available for acquisition of jewellery and secondly, it reduces the real return on gold. It has depressing effect on the component of demand in both ways.

Inflation redistributes incomes in favour of non-wage income earners, leading to more skewed income distribution. With incremental income of non-wage earners, the demand for gold as a store of value can be expected to rise.

Supply of Gold
The main economic effects that arise from the changes in the supply of gold can be seen against the quantum of gold that is already in existence in the economy. The supply of gold is not up to the requirements as the production of gold is also coming down and demand for gold is going up very sharply.

Gold as an Investment Option:
Gold as an investment tool always gives good returns, flexibility, safety and liquidity to the investors. Therefore as a financial consultant my advice to you all is, kindly allocate a portion of your portfolio for gold investments. Practice the habit of buying at least one gram of gold every month.

Removal of Subvention for Sugar Industry!!

2008-09-01T00:34:00.000-07:00

Under Mulayam Singh's tenure a new Sugar expansion package was announced by the State Government, which was availaed of by Bajaj Hindustan, Balrampur, Dhampur, Oudh and Upper Ganges. No one thought about the supply of Sugarcane, so even as global Sugar prices rise why is the industry crying now? I think they will cry much more in 2009, when there will be no cane to crush.

Sugar exporters have expressed their dissension over the Finance Minister, Mr P. Chidambaram's suggestion to discontinue the subvention (grant of money) given to sugar exports before its deadline of September 30.

Speaking to reporters on the sidelines of a function to inaugurate currency futures at the National Stock Exchange, Mr Chidambaram said: "In my view, the subvention given for sugar exports must now come to an end. Much sugar has been exported now. I have spoken to the Ministry of Agriculture regarding this."

Of the export target of 45 lakh tonnes till end-September, sugar companies have exported 43.7 lakh tonnes till date. Last year, 18 lakh tonnes were exported.

Mr Naik Navre, Managing Director, Federation of Cooperative Sugar Industry in Maharashtra, said the move, if implemented, will be highly detrimental for the industry. "It will lead to exporters defaulting on their commitments and earn a bad name for the country," he added.

The Government announced a subvention of Rs 1,350 a tonne on sugar exports last year on the back of a bumper production. Last few months sugar prices have been rising in the domestic markets raising Government's concern.

"The removal of subvention will not have any impact on the domestic prices as they are driven by other factors," said an exporters

Overseas scenario

Expectation of lower sugarcane output in India and Brazil next year has pushed up global prices by over 17 per cent in last three months. In fact, sugar was the only commodity that has withstood the sharp correction in commodity prices, said an analyst.

According to International Sugar Organisation, global sugar output is expected to fall 4 per cent to 161.6 million tonnes (mt) in sugar season ending September, 2009. In India, output is estimated to drop by 17 per cent to 22 mt next season, said Indian Sugar Mills Association.

The area under sugarcane cultivation in Maharashtra is also expected to go down by 26 per cent to 8 lakh hectares in 2008-09 against 10.88 lakh hectares last year. Consequently, the cane output is expected to drop 21 per cent to 702 lt (855 lt), while cane available for crushing is estimated lower by 35 per cent at 500 lt (761 lt).

Sugar production will be down 37 per cent to 57 lt (90.96 lt).

The sugar production in 2008-09 is estimated to fall 20 per cent to 217 lakh tonnes (lt), against 273 lt. It may slip further by 14 per cent to 187 lt in 2009-10 sugar season.

Avoid Dollar at "All Costs":Jim Rogers

2008-06-30T22:46:00.000-07:00

Courtsey:Bloomberg

Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said investors should steer clear of the dollar as the U.S. economy slows and favor commodities this year.

The dollar has slipped 7.7 percent against the euro and 5.9 percent versus the yen in 2008 as the Federal Reserve cut interest rates to stave off a U.S. recession. Oil prices have doubled in the past 12 months, while gold is up 44 percent.

Avoid the dollar ``at all costs,'' Rogers, chairman of Rogers Holdings, said in a speech in Shanghai today. ``The best investments in 2008 are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.''

Oil and metal prices in New York have surged as a slumping U.S. currency made them cheaper for non-dollar investors to buy as a hedge against inflation in a slowing global economy. The dollar has stabilized in recent weeks, with currency volatility falling by the most since 1999 this quarter.

The comments from Rogers, 65, come two days after he told investors at a conference in Nanjing not to ``give up'' on Chinese shares, which have made China the world's second worst performers this year. Rogers, who first started buying Chinese stocks in 1999, said he hadn't sold any of his holdings.

Commodity Bull
Investors failed to take heed today, as the benchmark CSI 300 Index extended an eight-month slump amid expectation government measures to slow inflation will hurt corporate profits. The gauge is down 53 percent from its Oct. 16 record and has dropped 23 percent in June. That would be the index's worst month since it was introduced in April 2005.

Rising food and fuel costs have helped to drive China's consumer prices to their highest in almost 12 years, prompting the central bank to lift interest rates six times last year and order banks to set aside a record amount in reserve to curb loan growth.

Speculation that the People's Bank of China would raise borrowing costs for the first time this year dragged the CSI 300 down by 5.5 percent on June 27.

Rogers, who now lives in Singapore, is best known for being a commodity bull since 1999, before the market started to rally in 2002. His Rogers International Commodity Index has more than quadrupled since it started in 1998.

The price of wheat, rice and soybeans reached records this year after adverse weather curbed global output and reduced stockpiles amid rising demand.

`Not High Enough'

Rogers is anticipating further gains in crude oil, which reached an all-time high of $142.99 a barrel on June 27. Futures were recently at $142.74.

``Crude oil prices are not high enough to stop people from consuming more energy,'' the investor said. ``The bull market will not go to an end until supply and demand come to a balance.''

His comments today echo the themes in his latest book ``A Bull in China: Investing Profitably in the World's Greatest Market,'' in which he tells investors to get out of the dollar, teach their children Chinese and buy commodities.

Rogers said last October he planned to shift all his assets out of the dollar, which fell to a three-week low against the yen on June 27. He predicted last month that the U.S. currency's decline would pause in the second quarter because it was overdone.

The real reason why oil prices are rising - Interesting Read!!

2008-06-05T03:24:00.000-07:00

The real reason why oil prices are rising

By now it is becoming too obvious that the United States is playing the oil game all over again. And this is the desperate gamble of a country whose economy is neck deep in trouble.

Given this scenario, managing prices of oil is central to the US economic architecture. Expectedly, this gamble has been played in a great alliance between the US government, US financial sector and the media.

The impending collapse of the US dollar on account of the inherent weakness in the US economy caused by its structural weakness as reflected in the sub-prime crisis;

The repeated softening of the interest rates in the US that has the potency to kill the US dollar; and how the fall in the US dollar suits the US corporate sector, especially its omnipotent financial sector.

Naturally, since the past few years, the US financial sector has begun to turn its attention from currency and stock markets to commodity markets. According to The Economist, about $260 billion has been invested into the commodity market -- up nearly 20 times from what it was in 2003.

Coinciding with a weak dollar and this speculative interest of the US financial sector, prices of commodities have soared globally.

And most of these investments are bets placed by hedge and pension funds, always on the lookout for risky but high-yielding investments. What is indeed interesting to note here is that unlike margin requirements for stocks which are as high as 50 per cent in many markets, the margin requirements for commodities is a mere 5-7 per
cent.

This implies that with an outlay of a mere $260 billion these speculators would be able to take positions of approximately $5 trillion -- yes, $5 trillion! -- in the futures markets. It is estimated that half of these are bets placed on oil.

Oil price hike: Govt can't save you: PM
Readers may note that oil is internationally traded in New York and London and denominated in US dollar only. Naturally, it has been opined by experts that since the advent of oil futures, oil prices are no longer controlled by OPEC (Organization of Petroleum Exporting Countries). Rather, it is now done by Wall Street.

This tectonic shift in the determination of international oil prices from the hands of producers to the hands of speculators is crucial to understanding the oil price rise.

Today's oil prices are believed to be determined by the four Anglo- American financial companies-turned-oil traders, viz., Goldman Sachs, Citigroup, J P Morgan Chase, and Morgan Stanley. It is only they who have any idea about who is entering into oil futures or derivative contracts. It is also they who are placing bets on oil prices and in the process ensuring that the prices of oil futures go up by the day.

But how does the increase in the price of this oil in the futures market determine the prices of oil in the spot markets? Crucially, does speculation in oil influence and determine the prices of oil in the spot markets?

Answering these questions as to whether speculation has supercharged the demand for oil The Economist, in its recent issue, states: 'But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of 'paper barrels,' but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.'

On both counts -- that speculation in oil is not pushing up oil prices, as well as on the issue of the build-up of inventories -- the venerable Economist is wrong.

The finding of US Senate Committee in 2006
In June 2006, when the oil price in the futures markets was about $60 a barrel, a Senate Committee in the US probed the role of market speculation in oil and gas prices. The report points out that large purchase of crude oil futures contracts by speculators has, in effect, created additional demand for oil and in the process driven up the future prices of oil.

The report further stated that it was 'difficult to quantify the effect of speculation on prices,' but concluded that 'there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.'

The report further estimated that speculative purchases of oil futures had added as much as $20-25 per barrel to the then prevailing price of $60 per barrel. In today's prices of approximately $130 per barrel, this means that approximately $100 per barrel could be attributed to speculation!

But the report found a serious loophole in the US regulation of oil derivatives trading, which according to experts could allow even a 'herd of elephants to walk to through it.' The report pointed out that US energy futures were traded on regulated exchanges within the US and subjected to extensive oversight by the Commodities Future Trading Commission (CFTC) -- the US regulator for commodity futures market.

In recent years, the report however pointed out to the tremendous growth in the trading of contracts which were traded on unregulated OTC (over-the-counter) electronic markets. Interestingly, the report pointed out that the trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron into the Commodity Futures Modernization Act in 2000.

The report concludes that consequential impact on account of lack of market oversight has been 'substantial.'

NYMEX (New York Mercantile Exchange) traders are required to keep records of all trades and report large trades to the CFTC enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. In contrast, however, traders on unregulated OTC electronic exchanges are not required to keep records or file any information with the CFTC as these trades are
exempt from its oversight.

Consequently, as there is no monitoring of such trading by the oversight body, the committee believes that it allows speculators to indulge in price manipulation.

Finally, the report concludes that to a certain extent, whether or not any level of speculation is 'excessive' lies entirely in the eye of the beholder. In the absence of data, however, it is impossible to begin the analysis or engage in an informed debate over whether our energy markets are functioning properly or are in the midst of a speculative bubble.

That was two years back. And much water has flown in the Mississippi since then.

Now to answer the second leg of the question: how speculators are able to translate the future prices into spot prices.

The answer to this question is fairly simple. After all, oil price is highly inelastic -- i.e. even a substantial increase in price does not alter the consumption pattern. No wonder, a mere 3-4 per cent annual global growth has translated into more than a 40 per cent annual increase in prices for the past three or four years.

But there is more to it. One may note that the world supply and demand is evenly matched at about 85 million barrels every day. Only if supplies exceed demand by a substantial margin can any downward pressure on oil prices be created. In contrast, if someone with deep pockets picks up even a small quantity of oil, it dramatically alters the delicate global demand-supply gap, creating enormous upward pressure on prices.

What is interesting to note is that the US strategic oil reserves were at approximately 350 million barrels for a decade till 2006. However, for the past year and a half these reserves have doubled to more than 700 million barrels. Naturally, this build-up of strategic oil reserves by the US (of 350 million barrels) is adding enormous pressure on the oil demand and consequently its prices.

Do the oil speculators know of this reserves build-up by the US and are indulging in rampant speculation? Are they acting in tandem with the US government? Worse still, are they bordering on recklessness knowing fully well that if the oil prices fall the US government will be forced to a 'Bears Stearns' on them and bail them out? One is not sure.

But who foots bill at such high prices? At an average price of even $100 per barrel, the entire cost for the purchase of this additional 350 million barrels by the US works out to a mere $35 billion. Needless to emphasise, this can be funded by the US by allowing it currency printing presses to work overtime. After all, it has a currency that is acceptable globally and people worldwide are willing to exchange it for precious oil.

No wonder Goldman Sachs predicts that oil will touch $200 to a barrel shortly, knowing fully well that the US government will back its prediction.

And, in the past three years alone the world has paid an estimated additional $3 trillion for its oil purchases. Oil speculators (and not oil producers) are the biggest beneficiaries of this price increase.

In the process, the US has been able to keep the value of the US dollar afloat -- perhaps at an extra cost of a mere $35 billion to its exchequer!

The global crude oil price rise is complex, sinister and beyond innocent economic theories of demand and supply. It is speculation, geopolitics and much more. Obviously, there is a symbiotic link between the US, the US dollar and the oil prices. And unless this truth is understood and the link broken, oil prices cannot be
controlled.

Ban of Commodity Futures: Is it justified? KARVY

2008-06-02T22:39:00.000-07:00

Futures trade in agriculture commodities had another bad day on 7 May 2008 with FMC announcing suspension of futures trade in four commodities namely chana, soy oil, potato and rubber for four months that is till 6th September. Government has already de-listed four major commodities like wheat, rice, urad and tur in January – February 2007. Government was under pressure from various political parties for last few weeks to impose ban on futures trade in essential commodities, alleging futures trading is responsible for sharp rise in prices. Inflation remained above 7% for four consecutive weeks from March onwards.

Commodity futures provide platform for farmers, traders, exporters and other corporates to hedge their positions. Speculators provide liquidity in the market with active participation. Prices of any commodity follow its own fundamentals and price manipulation by few traders is not possible if it is perfect market.

Supply-Demand mismatch
Prices of agriculture commodities especially edible oils, chana and rubber rose sharply in the past six months. Soy oil prices gained by about 35% with in short span of in five months (October 2007 and February 2008) and touched Rs.740 per quintal in domestic markets. Domestic prices moved up sharply tracking global prices especially CBOT and MDEX. At CBOT, prices gained by about 47% during same period. Global Soy bean output has declined by 7 percent to 220 million tonnes in 2007-08 against 237 million tonnes in previous year. Edible oil seeds production has also declined to 390 million tonnes compared to 408 million tonnes in last year. Major fall in soy bean output was in US with decline of around 20% in this season. Short fall in global output of soy bean and shifting large chunk of agriculture produce for bio-fuels led to sharp gain in prices of all the edible oils.

Chana prices also have gained by more than 30% in the last six months due to lower output concerns. Production of rabi chana 2007-08 estimated below 50 lakh tonnes compared to 58 lakh tonnes in previous year. Carry forward stocks are almost nil. Prices were trading at one year low of Rs.2000 per quintal during end of 2008 and lower estimates led to sharp rise in prices towards Rs.3000 per quintal in last 4-5 months. India imported more than 1.2 million tonnes of pulses in 2007-08 and failed to keep prices low as import prices ruled high. India annually produces about 13-14 million tonnes of pulses and this output almost stagnant for last 15 years. Consumption is rising every year with increasing population. India is largest importer of pulses and import about 2-3 million tonnes.

Rubber prices have gained by 23 percent in the last four months in domestic markets. Rubber global production is 9.89 million tonnes in 2007 compare to 9.68 million tonnes in 2006, while, consumption has increased to 9.73 million tonnes in 2007 from 9.21 million tonnes in 2006. India has produced about 8.25 lakh tonnes in 2007-08 compare to 8.53 lakh tonnes in previous year. Increasing demand for rubber in global markets and strong crude oil prices led to sharp rise in prices in recent past.

Potato prices fell from recent high of Rs.650 levels to Rs.450 with in span of one month with increasing arrivals. Output estimated at 28-29 million tonnes in 2007-08 higher from 25 million tonnes in previous season. Higher arrivals and lack of demand pulled down the prices of potato. Few state governments including West Bengal provided intervened in spot markets to support the prices.

Government measures
Government took various measures to control the rising prices of food commodities. It reduced import duty on refined edible oil from 40-45% to zero percent in March 2008 to control the rising prices of edible oils. India import about 50% of total domestic requirement and is price taker in global markets.

Price movement especially in Malaysia and US has direct impact on domestic markets. Edible oil prices have marginally come down in the past one month after Government reduced import duty on edible oils. Soy oil prices fell by Rs.150 per quintal with in span of one month. Apart from reducing import duties on edible oils, Government also directed states to strictly impose the stock limits on food grains and pulses.

Various states including Maharashtra, Andhra Pradesh and Delhi conducted raids on stock hoarders to bring out the excess stocks. This led to panic selling of pulses in spot markets and led to sharp fall in prices of most of pulses. Chana prices fell from recent high of Rs.3000 levels towards Rs.2300 with in one month period.

Impact of recent Government measures
In spite of taking these many measures, inflation remained high and touched 42 month high of 7.61% for week ending 26th April. Prices of most of agriculture commodities fell in the past few weeks as a result of Government intervention and also declining demand at higher levels apart from fall in prices of edible oils in global markets. However, higher prices of non-agriculture commodities like steel and cement remained high boosting inflation further.

Outcome of Abhijit sen committee report
Abhijit sen committee was constituted in March 2007 to study the impact of futures trade on agriculture commodity prices. it submitted report on 29th April 2008 to Government. It found no evidence of futures trade affecting the spot prices of agriculture commodities. His statements was, "I don't think one can say anything conclusively whether futures impacted prices," after submitting the report to Agriculture department. It recommended continuation of futures ban on wheat, rice, urad and tur, but not recommended any fresh ban on any commodities.

Is suspension justified?
Now big question arises as to what was the need for suspension of futures trade in four agriculture commodities when prices of edible oils have already eased and they are largely influenced by global factors rather than domestic factors.

It is strange that soy bean is left out from this list and Soy oil, a biproduct of soy bean has been suspended.

Chana prices have already fallen by 20% in last one month and what was the need to suspend futures rather than improving supply.

Potato prices are already trading at one year low and farmers are affected due to lower prices. Those who are demanding imposition of ban on futures trade in agriculture commodities are themselves providing support price to potato in West Bengal. Now it is very difficult to understand in what way Potato prices caused the inflation.

Volumes in rubber futures are almost nil in exchanges and there is no question of speculation increasing the prices with such low volumes. Also one should understand that Rubber and Soy oil are internationally traded commodities and domestic prices move in tandem with the international prices. Now it is important to watch for how long the disparity is maintained given the supply- demand mismatch across the world.

Various sections of people have criticized this decision of Government and real market players have lost confidence in futures trade. This includes representatives of various organizations of exporters, importers, processers etc. All these participants were using exchanges to hedge their positions. Now that in most of the rural areas NCDEX prices have become the bench mark, the farmer and small trader community will be deprived of better price discovery mechanism. Since Chana and Soy oil future contribute almost 35% of total Agri futures volumes, the future of Commodity derivatives market will be under threat.

Time and again suspension of future commodities trade to tame the domestic inflation will dilute the basic objective of introducing futures trade in India. As this is just a suspension and not a complete ban, the reintroduction may not result in good volumes since the participants have already lost their trust in Government. To conclude the government should focus more on ensuring enough supplies in the market with measures such as enhancing productivity, better cultivation practices etc.

CRUDE OIL BUBBLE: IS IT A CASE OF " IRRATIONAL EXUBERANCE"?

2008-05-28T04:44:00.000-07:00

The recent gravity defying surge in Crude Oil has attracted much attention and generated heated debate across the globe. A 99% annual appreciation in prices of world's principal source of fuel is bound to affect all countries and their inhabitants in a big way. The situation is even worse at MCX, India, where a depreciating rupee (against dollar) has further added momentum to the rally as a stronger dollar directly translates to costlier imports (read Crude Oil). In my previous posts in the same blog and numerous articles, presentations, lectures and private discussions, I had reiterated that the era of "Easy/Cheap" oil is over. However, the way the Crude Oil is scaling newer highs each day has put analysts across the world in a fix. It is not the $130 or $135 level which is alarming us but the speed with which these milestones are being achieved.

Market is equally divided between those who are seeing further upside and between those who are expecting a substantial correction in near term.

The reasons for a deeper correction/profit booking in Crude Oil are numerous.

There are many reasons to assume that market is overreacting to Oil bullish factors. What is being ignored is the fact that Commodity business is a cyclical one. Higher Crude Oil prices (or any other commodity) are self defeating as it directly translates into a reduction in demand as the consumers start cutting down on consumption or switches to cheaper alternative. Arjun Murti of Goldman Sachs who has to his credit many doomsday prophecies (including the recent Crude at $ 200 one) himself drives in a Hybrid car.

Many banks and investment firms have come out to defend the rise in oil prices, saying that it is based on fundamentals and that prices could rise much further. Analysts like Arjun Murti, Pickens, Guppy etc. and market movers like Goldman Sachs, UBS are constantly raising the projection levels in prices, thus sending the prices over the roof. While they go on saying this and prices continues to move upward, open interest in crude futures contracts has been moving steadily downward since a high of 1.58 million last July to 1.36 million now.

But aren't there fundamental reasons for this rise in oil prices? In some ways yes, demand from China and India is increasing, but at a slower pace than oil has gone up. The chief market strategist for one of the world's leading oil industry banks, David Kelly, of J.P. Morgan Funds, recently admitted something telling to the Washington Post, "One of the things I think is very important to realize is that the growth in the world oil consumption is not that strong." One of the stories used to support the oil futures speculators is the allegation that China 's oil import thirst is exploding out of control, driving shortages in the supply-demand equilibrium. The facts do not support the China demand thesis however. The US Government's Energy Information Administration (EIA) in its most recent monthly Short Term Energy Outlook report, concluded that US oil demand is expected to decline by 190,000 b/d in 2008. That is mainly owing to the deepening economic recession. Chinese consumption, the EIA says, far from exploding, is expected to rise this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media. Last year China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US , by contrast, consumes around 20.7 million b/d. That means the key oil consuming nation, the USA, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of a percent of the total demand. The Organization of the Petroleum Exporting Countries (OPEC) has its 2008 global oil demand growth forecast unchanged at 1.2 mm bpd, as slowing economic growth in the industrialised world is offset by slightly growing consumption in developing nations. OPEC predicts global oil demand in 2008 will average 87 million bpd -- largely unchanged from its previous estimate. Demand from China , the Middle East , India , and Latin America -- is forecast to be stronger but the EU and North American demand will be lower.

Not only is there no supply crisis to justify such a price bubble. There are several giant new oil fields due to begin production over the course of 2008 to further add to supply.

The world's single largest oil producer, Saudi Arabia is finalizing plans to boost drilling activity by a third and increase investments by 40 %. Saudi Aramco's plan, which runs from 2009 to 2013, is expected to be approved by the company's board and the Oil Ministry this month. The Kingdom is in the midst of a $ 50 billion oil production expansion plan to meet growing demand in Asia and other emerging markets. The Kingdom is expected to boost its pumping capacity to a total of 12.5 mm bpd by next year, up about 11 % from current capacity of 11.3 mm bpd. In April this year Saudi Arabia 's Khursaniyah oilfield began pumping and will soon add another 500,000 bpd to world oil supply of high grade Arabian Light crude. As well, another Saudi expansion project, the Khurais oilfield development, is the largest of Saudi Aramco projects that will boost the production capacity of Saudi oilfields from 11.3 million bpd to 12.5 million bpd by 2009. Khurais is planned to add another 1.2 million bpd of high-quality Arabian light crude to Saudi Arabia 's export capacity.

Brazil 's Petrobras is in the early phase of exploiting what it estimates are newly confirmed oil reserves offshore in its Tupi field that could be as great or greater than the North Sea . Petrobras, says the new ultra-deep Tupi field could hold as much as 8 billion barrels of recoverable light crude. When online in a few years it is expected to put Brazil among the world's "top 10" oil producers, between those of Nigeria and those of Venezuela .

In the United States, aside from rumors that the big oil companies have been deliberately sitting on vast new reserves in Alaska for fear that the prices of recent years would plunge on over-supply, the US Geological Survey (USGS) recently issued a report that confirmed major new oil reserves in an area called the Bakken, which stretches across North Dakota, Montana and south-eastern Saskatchewan. The USGS estimates up to 3.65 billion barrels of oil in the Bakken. These are just several confirmations of large new oil reserves to be exploited. Iraq , where the Anglo-American Big Four oil majors are salivating to get their hands on the unexplored fields, is believed to hold oil reserves second only to Saudi Arabia . Much of the world has yet to be explored for oil. At prices above $60 a barrel huge new potentials become economic. The major problem faced by Big Oil is not finding replacement oil but keeping the lid on world oil finds in order to maintain present exorbitant prices. Here they have some help from Wall Street banks and the two major oil trade exchanges—NYMEX and London-Atlanta's ICE and ICE Futures.

Moreover, the argument that Crude Oil is tracking a weaker dollar doesn't hold true anymore. Euro has corrected sharply from its high of 1.6018 against the dollar. Signs of slowdown are being identified in Eurozone as well and ECB's Trichet has come under pressure to review his tight monetary policy. On the other hand recently released US economic indicators and have been largely mixed and point towards relative stabilization of Housing and labor market. Moreover with commodity prices going over the roof, US Federal Reserve may soon return to the policy of Inflation targeting. Interest-rate futures show the Federal Reserve may start to raise U.S. borrowing costs by the end of the year as the economy recovers and inflation accelerates. Earlier, seven interest-rate cuts by the Fed since September sent the dollar to an all-time low against the euro in April, boosting gold and other commodities.

Moreover, Crude Oil being a political (and strategic) commodity, we may very well see intervention from US on the issue of high prices. Entire global economy, especially that of US is under strong pressure due to Crude Oil induced inflation. Recently, the US House of Representatives overwhelmingly approved legislation allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude price. Already, President Bush in his recent trip to Gulf has pressurised Saudi Arabia, the most influential OPEC member to increase the Crude Oil production by 300,000 million barrels per day. Also, if recent indications are to be believed, U.S. Government is soon expected to force regulators to raise margin requirements under current market conditions, specifically with respect to the oil markets. This could have a dramatic downward effect on prices. (Remember silver and the Hunt Brothers in 1980.) In April 2008, U.S. Sen. Byron Dorgan, a North Dakota Democrat, told Congress, "There is an orgy of speculation in futures markets. This is a 24-hour casino with unbelievable speculation." He and others in Congress have been raising the idea of changing margin requirements that traders must pay up front in order to engage in oil speculation. Dorgan said stock speculation requires a 50% margin, but commodities like oil demand a much lower threshold, just 5% or 7%.

No doubt, Crude Oil, being in limited supply, is fundamentally strongest commodity around. But the way the recent spike has pushed the prices of the liquid gold has raised many an eyebrow and in coming days we may expect a substantial correction. Though a break below $100 is certainly not anticipated and too far fetched, a correction to the tune of $ 20 from current levels cannot be ruled out. However, traders should refrain from taking a short position arbitrarily and should wait for the confirming trend. Like any other market analysts, I too have faith in the old adage "Market is always right" and "Trend is your friend".

Courtsey:salmanspeaks.co.nr

Is there a Commodities Bubble - Lehman Brothers

2008-05-27T11:39:00.000-07:00

With due apologies to Commodity Bulls like Jim Rogers, we might have just created a monstrous bubble that will blow away off its own weight, says a study by Lehman.

The reasons are simple, 40 feet containers carrying Bulk Loads from Chinese ports to Eastern North American ports, now cost $ 8000, up from $ 3000 last year. If Crude were to go to $ 200 per barrels as most analysts now agree, this fare will rise to $ 20,000.

The result; increased domestic production in the US, reduction in trans China-US bulk trade and possible stress on pan Asian Commodity trade.

Simply speaking, the Commodities bubble is unsustainable and will collapse under its own stress. If not, there cannot be a one-sided move in Commodity prices without that being reflected in the fundamentals of Commodity producers.

-Commodity index investors bypass speculator position limits set by the CFTC
-About $90 billion has flowed into commodity indices since 2006
-Commodity markets are much smaller and illiquid compared with equities & bonds
-Dollar weakness and inflation expectations are behind fund inflows and this causes a substantial price effect for some commodities.
-Fundamental loosening can be disguised by Saudi Arabia and China.
-Equities go up long-term with human progress; not always true for commodities

Past performance, dollar weakness, and inflation expectations have driven substantial financial inflows to commodity indices, potentially feeding into higher prices.

~Financial Inflows to Commodities

Oil prices this week reached all-time highs above $125/bbl, topping off a $50+ run-up since September 2007, perhaps the most visible increase of the across-the-board rise in commodity prices.

A fierce debate has erupted over the permanence of this bull run: some analysts argue that the massive price increases are the rational market response to tight supply-demand fundamentals, while others point to speculator activity as proof of its bubble-esque nature.

The debate also carries a political dimension, as OPEC has resisted calls to increase production by blaming speculators for rising prices.

Undoubtedly, financial investors have made huge commodity investments in the past five years. One channel for this flow has been commodity indices such as the GSCI and the DJ-AIG Commodity Index. These indices bypass traditional speculative position limits imposed by CFTC regulations, allowing pension funds and other investors to assume massive long positions in hitherto untouchable markets.

It is difficult to ascertain the exact size and effect of these indices, but based on their known positions in certain commodities and their reported cross-commodity weightings, one can estimate their overall size.

We estimate that total assets under management (AUM) in commodity indices ballooned from about $70 billion at the beginning of 2006 to $235 billion by mid-April this year (Figure 1). Of this $165 billion increase, about $90 billion is accounted for by financial inflows into these indices, with the other $75 billion stemming from price appreciation of the original underlying investment.

These figures may seem miniscule compared with the trillions of dollars sloshing around in global bond and equity markets, but commodity markets are comparatively small and illiquid. Even a $1 million inflow, as we shall see, can have a major effect in certain commodities.

Inflows have seen a major spike since December last year, with the lion's share of the contribution coming from the energy-heavy GSCI index.

What Causes Index Inflows?
Financial investment in commodities is commonly considered a hedge against two concerns: dollar weakness and inflation. Another reason might be a general flight away from the underperformance of more traditional asset classes such as equities.

Regressing our estimates of financial inflow against past 1-week returns on the dollar and breakeven inflation on 5-year T-notes, we find that dollar weakness and breakeven inflation indeed predict inflows for both GSCI and DJ-AIG, both at high levels of significance.

We also find that underperformance of the S&P also predicts inflow, although at weak significance levels (Figure 3). But perhaps most interesting, we find that the performance of the GSCI and the DJ-AIG over the past month also strongly predict inflows to the indices, suggesting a significant amount of momentum-chasing.

Do Index Inflows Affect Prices?
Given these substantial financial inflows to commodity indices, can we measure their effect on prices? Unfortunately, this analysis presents considerably higher obstacles. Ideally, we would want to measure the true liquidity-adjusted inflow to capture the true market impact, but outside noise from fundamentals, the annual reweighting of the indices, and unobserved over-the-counter activity cloud the picture.

There seems to be substantial variation in the market impact of index inflows across commodities, likely because of differences in liquidity. For WTI, a relatively large and liquid market, a $100 million inflow appears to cause a +1.6% rise in price at the 0.1% level ofsignificance, whereas a $1 million inflow alone into cocoa appears to cause a 3.2% price jump.

Furthermore, inflows to the GSCI seem to have a substantially higher effect on commodity prices than similar inflows to the DJ-AIG index, possibly reflecting the higher share of GSCI-mimicking lookalikes in the index universe.

Ingredients of a Bubble
Given the aforementioned causes and effects of financial inflows, we see many of the essential ingredients for a classic asset bubble. Performance-chasing financial inflows to commodities cause prices to rise, thus delivering good performance and, in turn, attracting even more inflows. This phenomenon can be self-fulfilling, especially in an environment in which lack of information about the true state of inventories in China or spare production capacity in Saudi Arabia delays any fundamental market correction.

But in the buzz around commodities, investors may have forgotten the obvious:
Commodities are inherently cyclical assets whose prices fluctuate around some longterm (but potentially changing) equilibrium level, while equities are shares in the future cash flow of dynamic firms providing long-term returns from technological progress.

For commodities, technological progress increases both demand and supply, making long-term price appreciation, even for non-renewable commodities, uncertain at best. Adjustment to a higher equilibrium price may mimic superior returns in the short term, but they are unlikely to last forever.

The Glittering Run For Gold Is Over!!! UBS

2008-05-15T02:50:00.000-07:00

Gold has benefited from dollar strength and investor and speculator buying due to fears of stagflation and the impact of the credit crunch. We forecast that gold will fall over the next two years to levels better supported by jewellery demand.

We forecast that gold will average $851/oz in 2008, higher than our previous forecast due to the better than expected Q1-08 outcome. Our forecast of $750/oz for 2009 is unchanged.

The consensus forecast is for gold to average $862.30/oz according to the LBMA forecast 2008 publication.

Performance
Speculative and investment buying resulted in gold trading sharply higher in January and February, breaking the previous all-time high of $850/oz in the first real trading day of 2008 and then going on to set records, culminating in a new all-time high of $1030/oz.

But gold could not hold onto these lofty levels and slipped back to trade down to $874/oz. After a bounce to just above $950/oz in

April, the metal has succumbed to more widespread profit taking and is trading around $880/oz at the time of writing.

In the absence of the unusually strong safe-haven buying of gold we believe gold would be trading near $700/oz and the metal is vulnerable to a further correction.

Demand environment
The first three months of 2008 saw very poor jewellery demand as gold moved sharply higher with our sales desks report jewellery demand of 5-15% of the levels we consider strong. The sell-off in gold in late March has seen some recovery but demand remains much lighter than normal for the time of the year and this leaves the metal vulnerable to further profit taking.

ETF investors bought only 2.0 million ounces of gold in the first quarter of 2008, disappointing considering the very strong performance of gold. Net redemptions have occurred since then and as at 24 April, total ETF positions stood only 600koz higher than on December 31st with 1.6moz of redemptions between 22 and 24 April.

US futures market gold investors held large spec long positions through the first ten weeks of 2008 before liquidating some of their holdings in late March and April.

Supply environment
GFMS report that gold production fell by 0.4% in 2007 to 2,476t as mining companies struggle to maintain existing production and are failing to find new mines to expand. We expect gold supply will remain under pressure in 2008, not least because of the power and other production problems faced by the South African mining industry, discussed in more detail in the introduction to the precious metals section.

Our refinery contacts and physical sales desks in Switzerland report a surge in the sale of scrap gold coming back to the market with the gold price at such elevated levels. This is reducing the jewellery industry¡¯s net demand for gold.

Gold mining de-hedging continued at a rapid pace in 2007 according to GFMS, which estimates the net hedgebook declined by a record 446t. The remnant of the global hedgebook is now small to GFMS and increasingly concentrated in a only a few mining companies. We expect the rate of producer de-hedging to slow in 2008, but we have said that every year for the past few years and have been surprised by aggressive buy-backs each year.

Central banks remain net sellers of gold, disposing of a total of 481t in 2007, more than the 370t sold in 2006. The vast majority of the sales in both years came from the signatories of the Central Bank Gold Agreement (CBGA) with Spain and Switzerland the most interesting sellers. Spanish sales increased sharply in 2007 while Switzerland, a large seller under the first CBGA, restarted sales due to the high gold price, which had increased gold¡¯s proportion of its total reserves.

Some small central bank buying was noted in 2007 including Qatar and Russia, although most large central banks that have small gold holdings remained sidelined.

News-flow to watch for
The quarterly results of the gold miners with hedgebooks ¨C including AngloGoldAshanti, Barrick and Newcrest ¨C for signs of further de-hedging.

Weekly COTR data from the CFTC and daily open interest figures from
TOCOM are useful measures of visible speculative positioning.

Quarterly supply and demand reports from the World Gold Council.

Captilizaing on Commodities Bubble-Michael Shluman

2008-05-03T03:09:00.000-07:00

There's a black cloud looming over the commodities market. However, behind that cloud, those of us who are situated on the short side (that is, buying put options and profiting when stocks are going down) can expect to find a rainbow with a pot of gold at the end.

I know, I know: Wheat is up 600% a bushel. Oil touched an inflation-adjusted, all-time high and seems as though it's setting up permanent residence above $100 a barrel. Gold prices were a straight tear up (although a recovery in the U.S. dollar has helped capped them).

I can hear you now: "There's no way to play the short side of the commodities sector, Shulman."

Longer term, there's every reason to believe that commodity prices will be high and perhaps go even higher. You might have heard a lot about growing infrastructure and demand in areas like "Chindia" (i.e., China and India) and other developing nations.

With this boom will come increased need for food, building materials and energy sources. As emerging countries become more industrial, it is only natural that more jobs will be generated, leading to a higher standard of living and even more commodity consumption.

That's the big-picture outlook. But with a slowing U.S. economy and its carryover into the global community, not to mention the fact that the big-money players (i.e., institutions, hedge funds) are piling into commodities and inflating the prices with their speculative buying, what does it mean for us in the short term and, more specifically, on the short side?

Even as the economy seems to be taking a rest, commodities are likely going to pull back before they keep going up, up and away. This bubble is building.

In some commodities, there's a classic parabolic bubble, which is a short-side investor's dream.

Perhaps gold can run to $1,600, as "Mad" man Jim Cramer thinks -- but will wheat remain near their high of $25?

Will a fertilizer and feed producer -- which is on my "short" list of companies that are going to get hit when the commodities bubble starts deflating -- manage to stay in the stratosphere? Will platinum keep shooting skyward?

Smart short-side investors need to identify the commodities that are driven by economic reality and look for places to establish short-side plays for the commodities or companies on a free ride with the run-up in prices. There are plenty, but there are also some rules to follow:

Rule 1: Don't get ahead of the bubble bursting. It's better to miss the beginning than get run over by being too early.

Rule 2: Focus on those commodities most tied to economic reality.

Rule 3: Avoid commodities that are potentially driven by geopolitical events.

Rule 4: See rule No. 1.

So, how do you profit while commodities are poised for a pullback? There are two main areas I'm investigating right now.

The first is agricultural commodities. There's no way that wheat will stay at $25 (up from $4 last year), or that a company we're riding on will remain around $160 (up from $60 just one year ago!).

There are several exchange-traded funds (ETFs) and several overbought companies in this sector, so I am looking at them carefully right now. I also have a close eye on precious metals other than gold -- namely, platinum and silver. This segment can also be played by a mixture of ETFs and individual companies.

But for every opportunity, there is a sinkhole, and I can tell you what I will not be shorting.

Gold. Avoid playing the short side of gold at all costs. It is tied to the U.S. dollar and geopolitical issues -- and just possibly to the people who built bomb shelters in the '60s and their offspring who created hideaways in preparation for Y2K.

Oil. The fundamentals show that oil prices will rise because they are also tied to the dollar and geopolitical events. Stay far, far away.

In general, I'm keeping anything that is tied to the U.S. dollar -- or other factors beyond the segment that can change on a dime and decimate a play -- far from my "short" list.

But remember, you can play the short-side of individual stocks, sectors and, soon, commodities -- and you should.

Where are Aluminium Prices Heading?

2008-02-17T23:07:00.000-08:00

Courtsey:According to Karen Norton from Reuters.

Analysts feel Supply problems will support the aluminium market in the near term, but high inventories will act as a brake on any attempt to move sharply higher. The LME three-months price reached a six-month high of $2,738 a tonne last week, driven up by severe winter weather in China and its worst-ever power cuts. Traders last estimated that around 1.5 million tonnes of annual aluminium smelting capacity had been shut. Producers in southern Africa cut their power usage to help ease a power shortage there. Adams of Basemetals.com feels prices could get up to $2900 in next month but can't be sustained due to high stock levels. Another consultant Angus MacMillan said the supply woes would make some difference to the market balance this year, but also thought the worsening economic outlook would counter that to some extent by having a negative impact on demand.Most analysts had been predicting a modest supply surplus this year.

(Thus the outlook could be threatened if analysts have undermined the extent of the current problems.) Stephen Briggs, economist at SG Corporate and Investment Banking thought aluminium had the least downside potential of all the LME-traded metals as recession loomed, due in part to the fact that it had made the least gains in recent years.

Some recent developments in production, stocks and prices that may influence the direction of the aluminium market in 2008 has been listed in the report.

PRODUCTION:

Jan. 31 - Rio Tinto Ltd/Plc said it reached a new power supply pact with the local utilities authority for its Kitimat aluminium smelter in British Columbia, Canada, allowing it to proceed with a 125,000 tpy expansion to 400,000 tpy.

Jan. 31 - BHP Billiton said it would cut power usage at its three aluminium smelters in southern Africa by 10 percent to help ease a power shortage. The reduction would gradually take place at the Hillside and Bayside smelters in South Africa and the Mozal operation in Mozambique and be completed in around five days.

Jan. 30 - China's worst-ever power shortage and severe winter: As of Feb. 5, traders estimated up to 1.5 million tonnes of aluminium smelting capacity was shut in order to conserve power to residences.

Jan. 30 - Rio Tinto said its planned Coega aluminium smelter in South Africa is progressing despite the country's power crisis. The project, due to produce 720,000 tpy of aluminium, will go the Rio Tinto board around mid-2008 for final approval.

Jan. 29 - Netherlands-based aluminium company Vimetco said it would focus on adding bauxite mine assets to its portfolio in a bid to become a fully integrated producer of the metal. On Feb. 5, the company said the Ministry of Mines in Guinea granted it a reconnaissance permit for the prospecting of bauxite in the Kindia Prefecture in Guinea. Vimetco also said its Tulcea alumina refinery in Romania, now closed for rehabilitation work, would probably restart in the second half of next year, subject to overall market conditions. The refinery has the capacity to produce around half a million tpy of alumina.

Jan. 25 - China's Bosai Minerals Group Co said it would invest $694 million to build a 1 million tpy alumina refinery in Guyana. Construction would start in the first half of 2009 and begin production two years later. Bosai expects its alumina production capacity in China to jump to 500,000 tpy from last year's 200,000 after a 300,000 tpy plant near Chongqing launches production by the end of 2008. Bosai expects to increase its aluminium smelting capacity to 200,000 tonnes in 2008 from last year's 130,000 tonnes.

Jan. 25 - China produced 12,283,600 tonnes of primary aluminium in 2007, up 33.8 percent from a year earlier, the National Bureau of Statistics said. Production of alumina rose by 47.7 percent over the same period to total 19,507,900 tonnes.

Jan. 25 - Power shortages could slow aluminium output growth this year to 22 percent to an estimated 15.0-15.5 million tonnes, from 12.3 million tonnes in 2007, out of a capacity of 16 million, industry officials said.

Jan. 21 - Daily average primary aluminium output in December rose to 69,700 tonnes compared with an upwardly revised 69,300 in November, provisional figures from the International Aluminium Institute (IAI) showed. In December 2006, daily average output was 66,400 tonnes.

Jan. 18 - Ormet Corp. said its Hannibal aluminium smelter in Ohio was completely up and running. At full capacity the plant produces 260,000 tpy of aluminium. The company restarted the last of its smelter's six potlines on Nov. 28.

Jan. 17 - An official of South African power utility Eskom said Alcan's Coega aluminium smelter plant could be delayed as it reviews its power supply for the project.

Jan. 11 - The annual rate of primary U.S. aluminium production surged 17.7 percent to 2,712,197 tonnes in December from 2,303,998 tonnes in December 2006, the Aluminum Association said. December's output rate was the highest since April 2003. For the year, 2007 production increased 12.2 percent to 2,559,673 tonnes from 2,280,916 tonnes a year earlier.

PRICES

Having ended 2007 just above $2,400 a tonne, aluminium prices trended higher in early January, albeit within their well-established trading range.

Worries about a recession in the United States took the whole LME complex lower later in the month, with aluminium trading down to $2,377 on Jan. 22.

But prices recovered and then shot higher at the end of last month as it emerged that Chinese smelters had been hit by power shortages and severe weather conditions. This came on top of power supply woes in South Africa.

On Feb. 1, the three-months price reached a six-month high of $2,738 a tonne and, despite easing since then, further gains have been mooted.

In January, the twice-yearly Reuters base metals price poll of 42 analysts put the 2008 median average for the LME cash aluminium price at $2,506 a tonne in 2008 and $2,540 in 2009. In 2007 the price averaged over $2,665 a tonne.

STOCKS

Total exchange stocks were 1,065,183 tonnes at the end of January, little changed from 1,046,002 tonnes. Of that total, some 956,475 tonnes were held in LME warehouses, compared with 929,450 tonnes a month earlier. Total visible stocks, including latest International Aluminium Institute (IAI) unwrought stocks (0#STOCKS-IAI) were 2,618,183 tonnes, equating to about 26 days of consumption.

Estimated aluminium stocks at the Japanese ports of Yokohama, Nagoya and Osaka totalled 198,600 tonnes in December, up 12 percent from a record low of 178,100 tonnes a month earlier, an official at Marubeni Corp said. Inventories may have risen due to the arrival during the month of delayed shipments from Venezuela, the official said. Inventories were about 15 percent below the year-earlier level of 233,900 tonnes.

Credit Suisse-Sub Prime Crisis and Commodities!!

2008-02-17T06:54:00.000-08:00

The worst of the banking crisis resulting from the subprime meltdown is likely to be over in months rather than quarters, Credit Suisse (CSGN.VX) Chief Executive Brady Dougan was quoted as saying on Saturday.

Dougan said in an interview in the Neue Zuercher Zeitung he was an optimist and it could take three, four, five months before the crisis bottomed out.

"I believe I can already detect a certain easing of tension in liquidity and credit provision, but the big problems that set off the crisis have not yet been dealt with," he said.

"There would undoubtedly be much greater confidence if prices in the U.S. real estate market, where the crisis originated, finally stabilized. That could happen as soon as the middle of this year. But we are preparing for the possibility that the crisis continues for some time," he said.

The crisis has set off write-downs running to more than $100 billion by banks globally. Experts say final losses may reach as high as $400 billion.

Dougan forecast it would remain hard to find buyers for securitized and structured products. Buyers will only appear when the underlying assets have a market price.

At that point there would be a lot interest because of current low valuations, and there would be a prospect of considerable price rises.

"As soon as confidence returns, things will probably go up quickly again," he said.

In rare cases, Dougan expected securitized claims to be restructured, but many people holding them will be forced to wait for a better market climate, he said.

Meanwhile the mistrust between banks that has led money and credit markets to seize up was dissipating.

"Liquidity has generally improved somewhat. That's an important sign," he said. "Although markets are still far from normal, a modest recovery can be detected. The trend is now in the right direction."

Credit Suisse has suffered only limited fall-out from the subprime mortgage crisis, trimming full-year 2007 write-downs linked to the debacle to 2.0 billion Swiss francs ($1.83 billion) and pulling in billions in new investments from wealthy clients.

Its Swiss rival UBS (UBSN.VX) on the other hand has been one of the worst hit, taking $18 billion of charges in 2007 and warning of more to come that could tip it into a second year of losses.

Dougan said he expected banks damaged by the crisis to lose wealth management customers, while better positioned institutions would pick them up.

Unlike other banks, Credit Suisse is not shedding investment banking staff, but is reallocating resources.

Thus it is expanding its commodities business and involvement in emerging markets while scaling back areas hit by the crisis such as mortgage securitization, structured products and high-yield financing for takeovers and buyouts, he said. Dougan acknowledged there was a risk of a commodities bubble.

"But we think that it has great potential. Even if prices contract after the long rally, increased earnings are possible in commodities," he said.

Gold Rising: Forbes

2008-02-04T01:20:00.000-08:00

The Allure Of Gold Is Rising

Once consigned to monetary oblivion, gold is re-emerging as an asset class. Restoration of its monetary use, though still a distant possibility, has moved a step closer to reality.

Gold for immediate delivery in London reached $929 per ounce in Asian trading on Jan. 29, an all-time nominal high. A main impetus to gold's current price ascendance is inflation fears: Gold is seen as a hedge against loss of currency purchasing power. Demand for the metal is also strong in Asia, for jewelery and as a store of value.

Despite gold's recent climb, it remains off its 1980 peak in real terms. In today's dollars, gold hit $1,766 in January 1980.

Understanding gold's monetary context is key: At that time, memories of gold's use in the international monetary system were fresh, and gold's place anchoring the system seemed natural. As economic and geopolitical difficulties beset the system, gold appeared a safer store of value.

Since then, no similar instability has driven gold prices as high. Shortly after 1980, expectations of an eventual restoration of a monetary role for gold were resolutely dashed:

--U.S. Congressional commission. Congress on Oct. 7, 1980, established the U.S. Gold Commission, whose aim was to make policy recommendations "concerning the role of gold in domestic and international monetary systems." Yet the commission's March 1982 report did not recommend restoring a monetary role for gold.

--Academic report. In the 1982 Brookings Papers on Economic Activity (Volume 1), economist Richard Cooper published a lengthy history of the gold standard and its future prospects. Cooper concluded that "both history and logic" refute the contention that stabilizing the gold price in dollar terms would stabilize the price level.

As these sentiments became policy orthodoxy, central banks rushed to offload gold holdings, putting further downward pressure on the metal.

Perceptions of transition in the international monetary system are now heightening gold's allure. Uncertainty over current world system longevity has three foundations:

1. Credit crunch. The current credit market crisis has led to a striking loosening of U.S. monetary policy, pushing yet more dollars onto an already over-supplied foreign-exchange market. Additionally, it has highlighted troubling aspects of recent innovations in the international financial system, particularly increasing systemic risk due to poorly understood synthetic securities and credit underwriting.

2. Bulging reserves. The current system undeniably is characterized partly by pegs to the center currency--the dollar. As in the 1971 death throes of the Bretton Woods system, dollar abundance is testing these pegs. Under Bretton Woods, commitments to peg demanded heroic reserve accumulation by U.S. trade partners. Inability to contain associated inflationary pressures led to the demise of pegs--and the system.

3. Center solvency. Typical concerns over the U.S. external position focus on U.S. national savings, or lack thereof. In fact, there are valid reasons for supposing that U.S. savings, and hence the strength of U.S. external accounts, are undercounted. A more pressing concern is solvency: Without reform, U.S. fiscal accounts might not be solvent on a long-term basis.

Gold's role as value store in uncertain times underpins its current high price. The shakier the international system appears, the greater the strength of gold. However, to recapture its 1980 peak, gold needs to be seen as standing a greater chance of reclaiming its historic role as a monetary asset. Yet:

--The business cycle is an unremarkable phenomenon; the greater likelihood is that the credit crunch will prove transitory, as will associated monetary easing and financial innovation worries.

--Compared to the 1970-73 cycle, today's reserve accumulation has been unspectacular. German and Japanese reserves rose nearly six-fold then, compared to less than a tripling of Chinese reserves in the 36 months to October 2007.

--More pressing is U.S. solvency: While the international monetary system cannot be based on the currency of an insolvent state, this issue has yet to permeate bond market expectations.

Towards Greener Tomorrow - Understanding Carbon Credit

2008-01-21T23:11:00.000-08:00

Amidst growing concern and increasing awareness about the need for pollution control, the concept of carbon credit came in vogue as part of international Kyoto Protocol. India is largest beneficiary of carbon trading, claiming about 31% of the total world carbon trade through the Clean Development Mechanism (CDM), which is expected to rake in at least $5-10bn over a period of time. India is being heralded as the next carbon credit destination of the world. This article delves into the concept.

The Concept of Carbon credit came into existence as a result of increasing awareness about the need for pollution control. It took the formal form after the international agreement between 141 countries, popularly known as Kyoto Protocol. Carbon Credits are certificates awarded to countries that are successful in reducing the green house gases(CHG) emissions that cause global warming.

It is estimated that 60-70% of GHG emission is through fuel combustion in industries like cement, steel, textiles and fertilisers. Some green house gases like hydro fluorocarbons, methane and nitrous oxide are released as by-products of certain industrial process, which adversely affect the ozone layer, leading to global warming.

Kyoto protocol
The Kyoto Protocol is an international treaty to reduce GHG emissions blamed for global warming. The Protocol, in force as of 16 February, 2005 following its ratification in late 2004 by Russia, provides the means to monetise the environmental benefits of reducing GHGs.

Kyoto Protocol is a voluntary treaty signed by 141 countries, including the European Union, Japan and Canada for reducing GHG emission by 5.2% below 1990 levels by 2012. However, the US, which accounts for one-third of the total GHG emission, is yet to sign this treaty. The US agreed to reduce emissions from 1990 levels by 7 % during the period 2008 to 2012, says www.eia.doe.gov. But others would hasten to point out that the protocol is non-binding over the US until ratified.

The preliminary phase of the Kyoto Protocol is to start in 2007 while the second phase starts from 2008. The penalty for non-compliance in the first phase is E40 per tonne of carbon dioxide equivalent. In the second phase, the penalty will be hiked to E100 per tonne of carbon dioxide.

The Protocol and new European Union emissions rules have created a market in which companies and governments that reduce GHG gas levels can sell the ensuing emissions ‘credits’. These are purchased by businesses and governments in developed countries – such as the Netherlands – that are close to exceeding their GHG emission quotas.

For trading purposes, one credit is considered equivalent to one tonne of carbon dioxide emission reduced. Such a credit can be sold in the international market at a prevailing market rate. The trading can take place in open market. However there are two exchanges for carbon credit viz Chicago Climate Exchange and the European Climate Exchange.

The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET). Under JI, a developed country with relatively higher costs of domestic greenhouse reduction would set up a project in another developed country, which has a relatively low cost.

Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of GHG reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET mechanism, countries can trade in the international carbon credit market. Countries with surplus credits can sell the same to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.

The EBRD region – former centrally planned economies of central and Eastern Europe, Russia, the Caucasus and central Asia – is rich in possibilities for using the Protocol to reduce emissions and energy waste and costs. Such economies are highly energy inefficient: it takes twice as much energy to produce a unit of GDP in Hungary and Czech Republic as it does in Western Europe and 10 times as much in Russia and Ukraine.

Understanding Carbon Credits
Carbon credits are measured in units of certified emission reductions (CERs). Each CER is equivalent to one ton of carbon dioxide reduction. India has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs) in the past two years. Developed countries that have exceeded the levels can either cut down emissions, or borrow or buy carbon credits from developing countries.

But how is carbon credit defined? It is action that helps reduce the atmospheric concentration of CO2, such as fossil-fuel conservation and planting trees, defines Canadian Environmental Literacy Project (www.celp.ca). Carbon credits as defined by Kyoto Protocol are one metric tonne of carbon emitted by the burning of fossil fuels.

However, the text of Kyoto Protocol to the United Nations Framework Convention on Climate Change on http://unfccc.int shows no `credit’ in a simple search. “Tradable credits issued according to the amount of absorption of carbon and then sold to emission sources to offset their emissions,” is how www.watercorporation.com. au defines the phrase. “What polluting companies might use to pay for the maintenance of forests,” is the definition in the ecological glossary on projects.powerhousemuseum.com.

There are different types of carbon credit, you’d learn from an educative brochure titled `A Climate Change Projects Office Guide’ on www. dti.gov.uk. “Various types of carbon credits exist, each with different characteristics and potential value,” it begins, and classifies the credits under three heads.

First, `credits defined in the Kyoto protocol’include Assigned Amount Units (AAUs), Certified Emissions Reductions (CERs), Emission Reduction Units (ERUs) and Removal units (RMUs).

Second, `credits for specific emission trading markets to assist in achieving Kyoto targets’ including UK Allowances, and European Emission Trading Allowances (EAU).

Third, non Kyoto compliant credits’ under which are listed Emission Reductions (ERs) and Verified/ Voluntary Emission Reductions (VERs).

Trading In Carbon Credits (CC)
The concept of carbon credit trading seeks to encourage countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial incentives to others to do so as quickly as possible. Surplus credits (collected by overshooting the emission reduction target) can be sold in the global market. One credit is equivalent to one tonne of carbon dioxide emission reduced. CC is available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.

Developed countries have to spend nearly $300-500 for every tonne reduction in carbon dioxide, against $10-$25 to be spent by developing countries. In countries like India, GHG emission is much below the target fixed by Kyoto Protocol and so, they are excluded from reduction of GHG emission. On the contrary, they are entitled to sell surplus credits to developed countries.

It is here that trading takes place. Foreign companies which cannot fulfill the protocol norms can buy the surplus credit from companies in other countries through trading.

Thus, the stage is set for Credit Emission Reduction (CER) trade to flourish. India is considered as the largest beneficiary of carbon trading, claiming about 31% of the total world carbon trade through the Clean Development Mechanism (CDM), which is expected to rake in at least $5-10bn over a period of time.

To implement the Kyoto Protocol, the EU and other countries have set up ‘cap and trade’ systems. Under these systems, companies are obliged to match their GHG emissions with equal volumes of emission allowances.

The Government initially allocates a number of allowances to each company. Any company that exceeds its emissions beyond its allocated allowances will either have to buy allowances or pay penalties. A company that emits less than expected can sell its surplus allowances to those with shortfalls.

Companies or countries will buy these allowances as long as the price is lower than the cost of achieving emission reductions by themselves.

Carbon Finance
‘Carbon finance’ is the term used for carbon credits to help finance GHG reduction projects such as the recent biomass conversion at Bulgaria’s PFS paper mill. The switch from hydrocarbon to biomass will reduce the mill’s GHG emissions, generating carbon credits being purchased for the account of the Netherlands government.

There are two categories of countries involved in carbon credit trading and finance:

(1) Developing countries which do not have to meet any targets for GHG reductions. However, they may develop such projects because they can sell the ensuing credits to countries that do have Kyoto targets. In the EBRD region these include Armenia, Azerbaijan, Georgia, Kyrgyz Republic, FYR Macedonia, Moldova, Turkmenistan and Uzbekistan. These countries are covered by the Protocol’s Clean Development Mechanism (CDM).

Industrialised countries which include OECD countries (the richest nations of the world) and countries in transition from centrally planned to open market economies. The latter include 13 of the EBRD’s countries of operation where the industrial base and other infrastructure are highly energy inefficient: Russia, Ukraine, Bulgaria, Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. They are part of the Protocol’s Joint Implementation (JI) mechanism.

Will Carbon Credit be Next Black Bubble?
GLENEAGLES Plan of Action on `Climate Change, Clean Energy and Sustainable Development’ has a section titled `Financing the transition to cleaner energy’. Paragraph 22 (c) in that section speaks of promotion of dialogue on market-based instruments, fiscal or other incentives, and also “tradable certificates and trading of credits for reductions of emissions of greenhouse gases or pollutants,” as one learns at www.number-10.gov.uk.

It seems, therefore, appropriate that the Finance Minister, during his recent trip to the US, was responding to the World Bank’s call to join hands in climate change mitigation, though with a diplomatic line: “We would be happy to remain engaged in the dialogue for exchange of ideas,” rather than easily shrugging off saying that India was not a party to the Plan adopted by the G8 in July.

But Indian companies are more than engaged in emission trading and booking carbon credit.

A recent report informs that SRF Ltd and Shell Trading International have entered into a deal “for sale and purchase of 500,000 CERs (Certified Emission Reductions) to be delivered on or before April 1, 2007”. The move made a strong impact on the charts. Another report, commenting on Suzlon, the country’s leading manufacturer of wind turbine generators, has an analyst writing that wind energy is eligible for carbon credit benefits under the Kyoto Protocol for a decade from 2002.

After Chicago Climate Exchange and the European Climate Exchange, MCX (Multi- Commodity Exchange of India) is likely to be the third exchange in the world with a license to trade in carbon credits, informs yet another news report.

British Energy is the latest international energy producer to overhaul its in-house and external legal set-ups as rising carbon credit prices force the industry to review costs, notes a posting on www.thelawyer.com.

Emissions trading are not elaborately dealt with in the protocol. Article 17 in it gives the job of defining “the relevant principles, modalities, rules and guidelines, in particular for verification, reporting and accountability for emissions trading” to the CoP or Conference of the Parties.

“The Parties included in Annex B may participate in emissions trading for the purposes of fulfilling their commitments under Article 3.” Annex B shows a list of countries and `Quantified emission limitation or reduction commitment’, as a percentage of base year or period. Among the countries are those with limits that are above their current production; and the buffer or the `extra’ is what can be sold to other countries on the open market, as tradable credit. “So, for instance, Russia currently easily meets its targets, and can sell off its credits for millions of dollars to countries that don’t yet meet their targets, to Canada for instance. This rewards countries that meet their targets, and provides financial incentives to others to do so as soon as possible,”

That apart, carbon dioxide sinks such as forests earn credits. Please note that buying credits is no substitute to domestic action to reduce emissions. Of current bearing would be `Summary of the Seminar on Linking the Kyoto Project-based Mechanisms with the European Union Emissions Trading Scheme’ on www.iisd.ca; it traces the history of the protocol and ETS.The Saskatchewan Soil Conservation Association (http://ssca.usask.ca) has an interesting article by John Bennett to help “farmers understand the benefits and the risks of being short-changed” by carbon markets. He offers a `30-second science lesson’: “A plant takes solar energy and by the process of photosynthesis, transfers the carbon dioxide gas into carbon (organic matter) and then returns the oxygen to the atmosphere. The removed carbon, which is stored in the soil and measured as organic matter is the RMU (emission removal).”

How is price determined for carbon credit? How big is the market? These are questions you may like to probe further. It may be a clue to know that a recent alert spoke of India standing to gain $5 billion from carbon credit in seven years. Another estimate, from the UK angle, cited on www.dti.gov.uk pegs the size of the market “at between euro 4.6 to euro 200 billion by 2010, with the former estimate based on purchases of carbon credits limited to compliance only, and the latter estimate subject to international political developments.” A `truly liquid market’, it notes. What is however for sure is that nobody can assure you that carbon won’t become the next big black bubble.

Carbon Credit: Rs. 15,000-crore Investments Likely
The unfolding opportunity of carbon credits has caught the imagination of Indian entrepreneurs. The number of Indian projects, in the fields of biomass, cogeneration, hydropower and wind power, eligible for getting carbon credits, now stands at 225 with a potential of 225 million CERs (certified emission reductions.

Each CER stands for one tonne of carbon dioxide reduction.) “This is just the tip of the iceberg. If there is no uncertainty as to what will happen beyond 2012, the number could easily cross the 2,000-mark,” according to Mr. S.K. Joshi, Joint Secretary in the Union Ministry of Environment and Forests.

The Kyoto Protocol required the developed nations to reduce greenhouse-gas emissions of at least five per cent from 1990 levels during the commitment period of 2008-2012. On the sidelines of the 93rd Indian Science Congress, he told Business Line that it was estimated that the new opportunity could trigger flow of investments to the tune of Rs.15,000 crore. Projects approved by designated CDM (Clean Development Mechanism) in the developing countries could earn carbon credits and sell them to the countries that required reducing the greenhouse gas emissions under the international agreement. “We are not at all under any pressure. Going for cleaner production was good for our own interest. In that process our companies can benefit by selling the credits,” he said adding that any project that was set up after January 1, 2000, was eligible for CDM recognition.

In a bid to throw light on the subject, public sector energy utilities such as NTPC, ONGC and Power Grid and the Ministry of Environment and Forests recently held a national level seminar. The Ministry had already started a project to sensitise and encourage States to take a lead in this regard. Initially five States — Andhra Pradesh, Rajasthan, Karnataka, Punjab and Maharashtra were given seed funding to set up their own CDM facilities and spread the word. Now it has been extended to 15 States while the ultimate aim is to cover the whole country by the year-end.

Demand for Carbon Credits Will Grow
The demand for carbon credits is expected to grow for the following reasons:

Because of projected shortfalls and higher relative carbon abatement costs, it is anticipated that OECD countries will fail to meet their Kyoto target by 2012. The higher relative emissions abatement costs in these countries mean that they will find it attractive to buy carbon credits generated elsewhere.

Private companies in industrialised countries will increasingly be subject to ‘cap and trade’ mechanisms, such as the EU Emission Trading Scheme which started on 1st January 2005 (although this will initially cover only 50% of emissions). The EU scheme is separate from the Kyoto Protocol but the ‘Linking Directive’ of 2004 allows a European company to buy Kyoto Protocol Carbon Credits to comply with their obligations under the EU Emission Trading Scheme.

Governments will also have to buy Carbon Credits because the ‘cap and trade’ mechanisms will initially only apply to a fraction of each state’s economy and Governments are responsible under the Kyoto Protocol for meeting their country targets. OECD Governments and European companies subject to the EU Emission Trading Scheme will therefore be the main buyers of Carbon Credits.

Low-Cost Carbon Credits Available in EBRD’s Countries of Operations
The reference year used by the Kyoto Protocol for targets in emission reductions is 1990. Since then, emissions have dropped sharply in countries such as Russia and Ukraine, as a result of substantial real contraction of GDP. It is expected that the targets of 13 countries of operation with Kyoto Protocol will remain below their agreed maximum greenhouse emissions. These countries will therefore be likely sellers of carbon credits. High carbon and energy intensities mean high potential for low-cost emissions reductions (low relative investment cost per tonne of GHGs avoided).

Role Of EBRD
The main role of the Bank in the field of carbon finance is to act as financier of emission reduction projects. However, in keeping with its principle of ‘additionality’ - supporting and complementing the private sector rather than competing with it - the Bank can play a number of additional roles:

Carbon Funds: The EBRD is well positioned to purchase, for the account of third parties, carbon credits from GHG emission reduction projects. The Bank’s added value in this area stems from:

l The size and quality of emission and reduction projects. The Bank is the largest financier of private sector deals in the region, with preferred creditor status, a rigorous appraisal process, and integrity and ‘good governance’ requirements. It also has lengthy experience in energy efficiency and renewable energy projects.

l The importance of closely coordinating the project financing and carbon buying process
l Strong relationships with host country governments, and its ability to engage in policy dialogue to remove or alleviate obstacles to carbon trading and mitigate the ‘political’ risks inherent to the JI and CDM project cycles
l Its experience in managing funds from its shareholders for a variety of purposes (e.g. nuclear safety).
l Its ability to access donor funds to help develop and implement projects.
l In October 2003, the EBRD established its first carbon fund, the Netherlands Emissions Reductions Co-operation Fund, with the Dutch Government. The fund buys Joint Implementation Carbon Credits from its 13 countries of operations eligible for this mechanism. Its first transaction was the PFS biomass conversion.
l The Multilateral Carbon Credit Fund will become operational in 2006. The fund will buy carbon credits from investments under the European Union scheme as well as the Protocol’s Joint Implementation and Clean Development Mechanism. It will also aim to facilitate the direct trading of carbon credits between some of its shareholders (so-called Green Investment Schemes).

Donor Funding: The Bank can help Governments and companies in its region of operations overcome obstacles in emission trading by providing technical advice funded by donor governments. For example, as part of the Bank’s Early Transition Countries Initiative for its poorest countries of operation, donors have approved funding to help in development of complex CDM projects.

Business Opportunities For Private Sector
EBRD’s carbon finance activities create new business opportunities for the private sector in this emerging market as:
l Selling carbon credits increases the feasibility of emission reduction projects, which helps to attract new private investors
l By being the buyer of carbon credits in a transaction, the EBRD can provide comfort to private sector buyers that would not otherwise consider these projects

At last count in March 2006, India had 310 ‘eco-friendly’ projects awaiting approval by the UN. Once cleared, these projects can fetch about Rs. 29,000 crore in the next seven years. India’s carbon credit market is growing, as many players (industries) are adopting the Clean Development Mechanism (CDM).

US accounts for 30% of global emissions, while India makes for three per cent. Now, India can transfer part of its allowed emissions to developed countries. For this, India must first adopt CDM and accrue carbon credits. One carbon credit or Certified Emission Reductions (CERs) is equivalent to one tonne of emission reduced.

In India so far, 242 projects have been identified for generating CERs while a total of 318 projects have received clearance by the Ministry of Forestry and Environment. For the Indian carbon market — this has the potential to supply 30-50% of the projected global market of 700 million CERs by 2012.

Conclusion
Even as India is being heralded as the next carbon credit destination of the world, with maximum growth on this front happening in Maharashtra, Chhattisgarh and Andhra Pradesh, Gujarat is slowly emerging as the dark horse of the country on the back of rapid industrialisation through its recent oil refineries and power projects.

Between the end of 2005 and December 2006, 450 clean development mechanism (CDM)
projects had been submitted to the ministry of environment and forests, of which around 420 CDM projects have received government approval, which make up a total of 350 million carbon credits, said a source from the ministry. Of the 420 projects, around 20 are from Gujarat.

Corporate biggies like Reliance and Essar are already present in the state. And now, most carbon credit consultants, including a few international environment players planning to set up shop in the country, are eyeing the Gujarat market.

Of the approved companies from Gujarat, Torrent Power has the maximum number of credits to its name with 11 million credits followed by ONGC’s Hazira refinery with approximately two million credits, Indian Farmers Fertiliser Cooperative Ltd (Iffco) with 1.5 million credits, Essar Power with 0.5 million credits, Reliance Industries’ approval for its base in Gujarat close to 2,40,000 credits, and Apollo Tyres with 1,00,000 credits.

Others include United Phosphorus, Gadhia Solar, Tata Chemicals, Rolex Rings, Alembic and Fairdeal Suppliers, said the source.

“Going by the current rates, where carbon credits are measured in units of certified emission reductions (CERs) and each CER is equivalent to one tonne of carbon dioxide reduction, the value of one carbon credit could be anywhere between three Euros and six Euros, and with bank guarantee can go up to eight or nine Euros,” said Pranav Nahar, managing director of Eco-securities, which boasts of being the only international developer and trader of carbon credits to have a liaison office in India.

Carbon credit analysts confirm that at least two leading international players have already begun dialogue with the government to acquire permission to set up liaison offices in India.

However, in spite of the global interest in India for the CERs market, there is still some way to go before it catches up with the market leaders in the field. While China leads the pack with a market share of 60% in the carbon credit trading, India lags behind with around 15% market share, said a leading environment analyst.

Compounding to its woes is its high rejection rates from United Nations Framework Convention on Climate Change (UNFCCC)’s Kyoto protocol.

“In spite of being preferred by most companies in the UK, Germany, Japan and Denmark, the reason India is still not counted among the top three carbon credit nations is because of its project rejection rate, which is as high as 50%,” said Nahar.

He also added that just because the government approves projects does not mean that validators or the CDM executive board will do so.

“The projects do not get approval mostly due to the consultants hired by Indian companies who if not well versed with the Kyoto protocol will not be able to comply with the strict UNFCCC norms,” he added.

CARBON EMISSIONS REDUCTION TRADING AT MCX!!

2008-01-21T22:59:00.000-08:00

Following is some handy information about the newly launched CARBON CREDIT FUTURES contract. The contents give the basic comparisons and the highlights of the contracts available on MCX and the corresponding Reference Market.

1. REFERENCE MARKET
European Climate Exchange – ICE ECX

2. MARKET TIMINGS - ECX
12:30 p.m. IST – 22:30 p.m. IST

3. PRICE QUOTE IN INTERNATIONAL MARKET
Euro per Ton

4. LIVE / HISTORICAL PRICES AVAILABLE AT
a. Reuters –
b. Bloomberg –

5. NEWS OR MARKET INFORMATION AVAILABLE AT
a. DowJones
b. Bloomberg
c. Point Carbon

6. CONTRACTS AVAILABLE ON MCX
a. 15th Dec 08
b. 15th Dec 09

7. CONTRACT SIZE
200 tons
CONTRACT VALUE: 200 * (23 Euros * 57 INR) = Rs. 262,200
(Assumption: current Price per ton is 23 Euros and current exchange rate is
INR 57 per Euro)

8. PRICE QUOTE
Rs. per Ton

9. TICK SIZE
50 paise per ton

10. PROFIT / LOSS PER TICK FOR A CONTRACT
Rs 100

11. DAILY PRICE LIMIT
5%

12. MARGIN
6% (Approx. Rs. 15897 per Ton)

13. AVERAGE DAILY VOLATILITY
3.5% (for the year 2007) i.e. Re. 1 on an average

14. DELIVERY
Both Option

15. DUE DATE RATE
DDR would be the settlement price of ECX CFI near month contract on the last day (expiry date) of the MCX CFI contract. The ECX CFI settlement price will be converted at the Rupee – Euro rates as notified by RBI on that particular day.

16. ECX Price movement
EXC (Euro) MCX (Rupees)
0.01 0.57
0.10 5.7
0.50 28.5
0.75 42.75
1.00 57

Assuming EURO – INR exchange rate is Rs. 57 per 1 Euro.

17. Comparison Table:
Exchange Timings Contract Size Tick Size
MCX 10:00 P.M. TO 11:30 P.M.(IST) 200 tons 0.50 Rupees
ECX (-ICE) 12:30 P.M. TO 10:30 P.M. (IST) 1000 tons 1 Cent

18. Important Historical Figures at the Reference Market

Price Movement EXC (Euro) MCX (Rupees)
Average Price movement in a day (For 2007) 0.39 Euro 38
Maximum Price movement in a day (For 2007) 4.00 Euros 228
All Time High (2007) (per ton) 26.00 1482
All Time Low (2007) (per ton) 11.80 672.60

CARBON MARKET IN INDIA

2008-01-21T22:23:00.000-08:00

Carbon Credits--A Business Oppurtunity

• Carbon credits – A new revenue source
• Kyoto Protocol came into force on February 16, 2005
• UNFCCC has designed CDM, under the Kyoto Protocol

The Kyoto Protocol is a legally binding agreement under which industrialized nations will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990.

The goal is to lower overall emissions from six greenhouse gases – carbon dioxide, methane, nitrous oxide, sulfur Hexafluoride, HFCs and PFCs –calculated at an average over the five-year period of 2008-12.

Kyoto Protocol & The Three Mechanisms to reduce emissions
• Joint Implementation (JI)
• Clean Development Mechanism (CDM)
• Emission Trading

What is Emission Trading?
Emissions trading (ET) is a mechanism that enables countries with legally binding
emissions targets to buy and sell emissions allowances among themselves.

Risk Elements in CDM
Delivery risk
- Project risk
- Regulatory risk
• • • Risk of certification
• • • Cap in European National Allocation Plan
• • • Implementation of ITL
- Risk of contract fulfillment

Market price risk (Fuel prices, weather, economic growth, EUA, etc.)

CDM Project Developer Common Concerns
• What is the real worth of my CERs?
• What are the various options to trade my CERs?
• What will it cost them to market CERs?
• Who is a reliable buyer?
• What is the time line involved?

EUAs Price Influencing Factors
• Policy issues
• CO2 emissions
• Weather/Fuel prices
• CERs
• Foreign exchange fluctuations

Pricing of CERs is based on
• Fixed contract
• Index linked contract - to get high prices of EU market

Price Influencing Factors
§ Supply-demand mismatch
§ Policy issues
§ Crude oil prices
§ Coal prices
§ CO2 emissions
§ Weather/Fuel prices
§ European Union Allowances (EUAs) prices
§ Foreign exchange fluctuations
§ Global economic growth

Correlation between various Energy Commodities and Carbon Credits
• Correlation between Brent Crude Oil and EUAs –78.05 % (2007)
• Correlation between Electricity and EUAs – 49 %(2007)
• Correlation between Electricity and Brent Crude Oil – 66.5 % (2007)
• Price Volatility of EUAs – 4.04 % (from inception on ECX platform to 14th November 2007)

Note: Brent crude oil and Electricity prices were from Intercontinental Exchange, while EUA prices are from ECX traded on ICE platform. Latest period considered in all the above cases for analysis was till 14th November 2007.

Emission Market Participants
• Hedgers
• Producers
• Intermediaries in Spot Markets
• Ultimate Consumers

Investors
• Arbitragers
• Speculators
• Portfolio Managers

Diverse participants with wide participation objectives
• Commodity Financers
• Funding agencies
• Corporates having risk exposure in energy products

Global Exchanges Trading Carbon Credits
• Nord Pool Exchange – Electricity & CERs
• European Energy Exchange (EEX) – Electricity, Coal, Natural Gas & EUAs
• European Climate Exchange (ECX) – EUAs& CERs
• Chicago Climate Exchange (CCX) – VERs
• Host of New Exchanges coming up

Why MCX in India?
• MCX alliance with the Chicago Climate Exchange (CCX)
• MCX can launch mini-sized versions of ECX CFI
• First exchange traded environment product in the Indian Subcontinent
• Designed to offer an advanced, standardized and financially guaranteed tool
• Timeline matches with Western markets
• Compliment natural gas and crude oil contracts
• No forex risk

Commodity Futures:India

2007-11-19T05:50:00.000-08:00

Commodity Futures is an agreement to buy or sell a set amount of a commodity at a predetermined price and date Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to gamble on price movements. Futures trading performs two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all the segments of the economy. It is useful to the producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. Farmers can get assured prices and there is transparency. It is useful for the consumer because he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. Predictable pricing & transparency.

Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. The other advantages being Improved Product Quality, Credit Accessibility.

Importance of Commodity Futures Market
Commodities market essentially represents another kind of organised market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate. Saturation in Financial Markets and the short term investment opportunities with high reward in the Commodity Future Markets offer wide potential for broadening, deepening,widening and strengthening of the commodity markets. The Markets need to tap the immense opportunities made possible by huge population and increasing per capita income.

Commodities Market Structure in India
All the Commodity Exchanges in India operate under FMC and function within the ambit of Forward Contracts Regulation Act (FCRA), 1952.The Commodity Market in India consists of 3 National Exchanges and 21 Regional Exchanges. Multi Commodity Exchange Of India Ltd.(MCX), Mumbai, National Commodity and Derivative Exchange Ltd (NCDEX), Mumbai, The National Multi Commodity Exchange of India Ltd (NMCE). Ahemedabad, are the 3 national exchanges, MCX being the largest of all in terms of volumes traded.National Board of Trade, Indore is the largest of all regional exchanges.The Indian market is regulated by the three-tier regulatory structure, comprising the Central government represented by the Ministry of Consumer Affairs, Food and Public distribution; the FMC and the Exchanges themselves which serve as self-regulatory organizations.

Participants in Futures’ Market:
The market participants include, Farmers/Producers, Merchandisers/Traders, Importers & Exporters, Consumers/Industry, Commodity Financiers, Agriculture Credit Providing Agencies, and Corporates having Price Risk Exposure in Commodities.

However there are challenges. The futures volumes vis-à-vis the physical volumes are relatively lower than markets like the US, UK, China etc. due to lack of awareness among the investors. Growth of futures market itself poses a challenge to the regulatory role of FMC. There is an obvious knowledge gap in the academic and general community about the market. Over dependency of a few commodities and their futures on global markets, poses a challenge.

Economic Indicators and impact!!

2007-11-18T23:59:00.000-08:00

Leading Indicators
Release Time: 8:30 ET around the first few business days of the month for two months prior.

The Leading Indicators report is largely a composite of prior indicators such as new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Because the report is highly predictable it is less likely to move the market dramatically.

The Federal Reserve watches leading indicators to aid decision making policy on interest rates.

Housing Starts and Building Permits
Importance: Moderate.
Volatility: Moderate.
Published by: The Census Bureau of the Department of Commerce
Release Time: 8:30 ET around the 16th of the month.
Coverage: Prior Month.

Housing Starts/Building Permits is a leading indicator of economic activity.

Event Fixed Income Equities Dollar
Housing Starts Up Bond Market Down Stock Market Up Little Impact
Housing Starts Down Bond Market Up Stock Market Down Little Impact

Housing Starts and Building Permits
Importance: Moderate.
Volatility: Moderate.
Published by: The Census Bureau of the Department of Commerce
Release Time: 8:30 ET around the 16th of the month.
Coverage: Prior Month.

Housing Starts/Building Permits is a leading indicator of economic activity.

Event Fixed Income Equities Dollar
Housing Starts Up Bond Market Down Stock Market Up Little Impact
Housing Starts Down Bond Market Up Stock Market Down Little Impact

Initial Claims
Source: The Employment and Training Administration of the Department of Labor.
Release: 8:30 ET each Thursday. Data is for week ended prior Saturday.

Initial jobless claims reflects the number of claims filed for state unempolyment benefits in the previous week. Increases in claims potential reflect slowing job growth, and decreases reflect accellerating growth in the job market. Due to the volatility of the number, many analysts look at a four week moving average. Look for a move of at least 30K in claims to indicate a significant change in job growth.

Nonfarm Payrolls
Importance: Highest.
Published by: Bureau of Labor Statistics, U.S. Department of Labor.
Release: First Friday of the month at 8:30 ET for the prior month.

The Non Farm Payrolls release - the change in non farm employment from the establishment data - is the most closely followed economic statistic for the stock and bond markets. The numbers that make up this part of the Employment Report use payroll records - furnishing the most concrete evidence of whether the US is creating jobs.

It is important to note that the change in Non Farm Payrolls includes government jobs - so for a clearer picture of the situation in the private business sector, government positions need to be factored out.

The Employment Report
Importance: Highest.
Published by: Bureau of Labor Statistics, U.S. Department of Labor.
Frequency: Monthly.
Release Time: First Friday of the month at 8:30 ET
Coverage: Prior Month.

Prior to the Employment Report we have only received the Auto Sales and Purchasing Managers Index and analysts have relatively little information to use in forecasting the direction of the economy. The monthly Employment Report is the most timely and broad indicator of economic activity and overall economic health. It provides a wealth of data on almost all sectors of the economy. The report is made up of two separate reports which are the results of two separate surveys.

Firstly, the Household Survey covers roughly 60,000 households and 120,000 people and tells us the unemployment rate. For the purposes of this survey, a person is considered unemployed if they do not have a job and are actively seeking employment.

Secondly, the Establishment or Payroll Survey covers 375,000 businesses, producing the nonfarm payrolls, average workweek, and average hourly earnings figures. Being larger and more comprehensive, the establishment survey is more closely watched. Payrolls are broken down into sectors including manufacturing, mining, construction, services, and government. The manufacturing sector is closely followed as it often leads the business cycle. A person is considered employed if they are on a firms payroll for any part of the pay period that includes the survey week. Federal government employment is an exception, being measured at the end of each month.

The average workweek is an important determinant of such monthly indicators as industrial production and personal income. Average workweek also reflects labor market conditions. A rising workweek early in the business cycle may indicate that employers are preparing to boost their payrolls, while late in the cycle a rising workweek may suggest that employers are having difficulty finding employees. Average earnings are used to gauge potential inflation. Broadly speaking, the employment report helps to forecast many other indicators. For example, a weak Employment Report can suggest a disappointing Retail Sales Report.

Market Reaction:
Event Fixed Income Equities Dollar
Payroll Employment Up Bond Market Down Stock Market Up Dollar Up
Unemployment Rate Up Bond Market Up Stock Market Down Dollar Down
Payroll Employment Down Bond Market Up Stock Market Down Dollar Down
Unemployment Rate Down Bond Market Down Stock Market Up Dollar Up

Auto and Truck Sales
Importance: Medium.
Source: Individual auto manufacturers, seasonal factors by the Commerce Department.
Volatility: Moderate.
Release: Date varies by auto maker from the first business day to the third business day of the month. Data is for month prior.

The Auto and Truck Sales data measures the monthly sales of all domestically produced vehicles. These sales comprise approximately 25% of total retail sales. The demand for autos and trucks is interest rate sensitive and a leading indicator of consumer demand.

Market Reaction:
Event Fixed Income Equities Dollar
Auto Sales Up Bond Market Down Stock Market Up Dollar Up
Auto Sales Down Bond Market Up Stock Market Down Dollar Down

The Purchasing Managers Index (PMI)
PMI measures how well the manufacturing sector is doing. PMI's index is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and employment.

Released By: Institute for Supply Management (ISM) - Formerly the National Association of Purchasing Managers (NAPM) the first business day of the month, 10:00am EST. The markets usually react as follows:

Fixed Income:
NAPM up = Bond Market down NAPM down = Bond Market up
Equities:
NAPM up = Stock Market up NAPM down = Stock Market down
Dollar:
NAPM up = Dollar up NAPM down = Dollar down

Industrial Production
Importance: Moderate
Volatility: Low
Source: Federal Reserve
Release Time: 9:15 ET around the 15th of the month.
Coverage: Prior Month.

The Industrial Production and Capacity Utilization Report describe what is going on in the manufacturing sector. These figures are not difficult to predict, and therefore have a low impact on the market.

Market Reaction:
Event Fixed Income Equities Dollar
Industrial Production Up Bond Market Down Stock Market Up Little Impact
Capacity Utilization Up Bond Market Down Stock Market Up Little Impact
Industrial Production Down Bond Market Up Stock Market Down Little Impact
Capacity Utilization Down Bond Market Up Stock Market Down Little Impact

Personal Income and Consumption
Importance: High.
Source: The Bureau of Economic Analysis of the Department of Commerce.
Release Time: 8:30 ET the fourth week of each month (data for the month prior).
Volatility: Medium.

The Commerce Department releases the Personal Income and Consumption figures the fourth week of each month, the day after GDP figures are published, using data from the previous month. Personal income is used to guage future consumer demand. The largest component of Personal income is wages and salaries. Other categories include rental income, government subsidy payments, interest income, and dividend income. A component of this figure covers personal consumption expenditures or PCE. PCE is comprised of three categories: durables, nondurables, and services.

Market Reaction:
Event Fixed Income Equities Dollar
Personal Income Up Bond Market Down Stock Market Up Dollar Up
Consumption Up Bond Market Down Stock Market Up Dollar Up
Personal Income Down Bond Market Up Stock Market Down Dollar Down
Consumption Down Bond Market Up Stock Market Down Dollar Down

Retail Sales
Importance: High.
Volatility: High.
Source: The Census Bureau of the Department of Commerce
Release Time: 8:30 ET around the 13th of the month.
Coverage: Prior Month.

Retail Sales can be a major market mover, and can be subject to significant revisions. This report measures the strength or weakness of consumer spending, using the total receipts of retail stores.

Market Reaction:
Event Fixed Income Equities Dollar
Retail Sales Up Bond Market Down Stock Market Up Light Impact
Retail Sales Down Bond Market Up Stock Market Down Light Impact

Michigan Consumer Sentiment Index - MCSI
The MCSI,conducted by the University of Michigan, is a valuable guide to changes in consumer attitudes that may influence spending behavior. The preliminary data is released on the tenth (except on weekends) of each month. A final report for the prior month is released on the first of the month.

EIA Inventory Reports
Each Wednesday the Energy Information Administration (EIA), a branch of the Department of Energy (DOE) releases inventory reports outlining activity in the energy sector at 10:30 AM EST.

The reports summarize weekly energy supplies and consumer consumption rates. The EIA petroleum inventory reports influence the price of crude oil and the energy market as a whole.

Gold:A reason to own!!

2007-11-10T11:00:00.000-08:00

The CEO of Freeport Mcmoran was on CNBC US, the other night. While the stock indexes plunged globally here was one guy with a smug smile on his face.

Reason: they own the biggest gold mines on earth and no new Gold discoveries have come about. At most a $ 1000 per ounce price tab, will see money being pushed into marginal mines to pull out whatever metal is left under the surface. In the entire history of mankind, the total physical Gold that has been mined equals a Cube with one side about 35 feet in height. Most of this Gold is held by individuals in Asia, and demand is rising as younger families set up homes and buy bullion to build and protect wealth. But there is no more metal in sight..so a possible multi-year bull market in Gold is in the making, that should see metal prices cross the $ 1500 to $ 2000 an ounce figure in maybe 2 years from now.

Miners can scarcely believe their eyes as gold soars through another 28-year record. How far can it go? So much money to spend digging! Suddenly there is no shortage of bullish forecasters to cheer them on!

Earlier this year US investment bankers Morgan Stanley saw a target of $ 800 an ounce for 2008. Then Goldman Sachs came in with an $850. The two bankers outbid themselves. And then there were the cautious Swiss. Its bankers UBS put up a miserable $760 for 2008 and $700 for 2009. They had been going for $650 and $550 respectively – whoops!

Australia ’s Bureau of Agriculture and Resources isn’t getting over-excited either. Being economists, they talk in averages. For 2007 they’ve computed $675 and for 2008 a figure of $685. At least we can understand that they don’t think gold will fall far. French bankers Societe Generale have been coy on a precise target, but are less bullish now gold’s gone through $750. Yet the Dutch, at bankers ABN Amro, are forecasting that gold will have a very good Christmas indeed.

Waves of investment and speculation
Maybe the Swiss, French and Aussies bankers aren’t so wrong to be cautious. UBS refers to the jewellery demand and the attention being given to gold by investors and speculators.

Its analysts are seeing “waves of investment and speculation”. (Trust the Swiss to spot the money flows. That’s why they’re going for wide price swings).Given the volatile conditions, that seems to be the pattern of all markets this decade, so profit taking should be expected.

Will it stay up, or will it go down? Everyone seems to be looking for inspiration in different places. Isabel and I have researched the world over, clicking our mice and logging notes.

Morgan Stanley is looking at global growth and spreading inflation problems. Both are good for gold. The record high oil price is doing more than its bit to fuel inflation fears. The International Energy Agency prompted oil forecasts of $100 for this winter, referring to “a lofty deficit.” The Germans, in the form of refining group Heraeus, said they were keeping an eye on oil in response to another factor - declining South African mining output. It was down 5.2% in the third quarter on a year ago.

The Germans also focus on central bank gold sales. That’s a huge point. Reducing central bank sales have brought gold up from 1999s depths of $251. And they have good reason note it. Germany’s Bundesbank is the largest central bank in the Eurozone. It has said it will sell only eight tonnes of its 120 tonne allocation in the new Central Bank gold agreement year (it starts this month). The remaining 3,414 tonnes will be held back.

ALL down to ETFs?
South African broker Macquarie First South is saying it is ALL down to the investors in Exchange Traded Funds (ETFs). “The ETFs are actually driving the gold price because there’s so much money going into ETFs,” the broker’s analyst David Hall says.The Indians are looking at themselves. India’s gold imports for jewellery have been a major impetus to the gold price rise. The peak gold-buying Dussehra and Diwali festivals are celebrated in November.

In the January-June period Indian gold imports shot up nearly 90% to 521 tonnes. Not only is the country increasingly prosperous, but the rupee has been rising. That has kept the gold price below the sensitive Rs 10,000 per ten gram level. While forecasts for increasing gold consumption are being cut over there, they still show a 15-25% increase.

More importantly, in a nation of 1 bn people, a couple of million marriages take place across the country in the months from Diwali to February, and even small amounts of gold bought per marriage of say 200 to 300 ounces works out to a whopping 200 mn to 300 mn ounces of Gold demand in perpetuity. Some agreeably will be re-cycled Gold, but the rest is demand for fresh Gold mined out of the Earth.

The coming years can be different as Governments rapidly de-base currencies and a Nation which had seen slavery for nearly 200 years will revert to buying even more Gold, in place of all other assets including cash and currencies.

In London the precious metal traders were looking at the weakness of the dollar against the Euro. Traders Virtual Metals is another with an $800 forecast. That’s based on the dollar falling along with US interest rates.

Also scoring in our log is that “super fund” set up by the big three US banks to help out market liquidity. Predictably, comment comes from JP Morgan. This should keep US interest rates, and thus global liquidity, accommodative it says. So, “inflation-related pressures on gold will continue”.

De-hedging programmes at the mines have been providing yet more backing for gold. Those smart Australian economists quite rightly make a big thing of this. If the miners put tonnes of their future, as well as present, production on the market, that is a big dampener. Miners may “hedge” or guarantee their income by doing this. The weight of supply kills the price.

Rising gold removes the incentive to sell future production. “In the first half of 2007, gold producers reduced their outstanding hedge positions by around 300 tonnes, providing strong support for the gold price,” says the Australian Bureau of Agricultural and Resource Economics’ latest commodity review. Majors who did this included Barrick Gold, Newmont, Lihir Gold, and AngloGold Ashanti.

Everyone is trying to pick the top
There are detractors around. Better be prepared for the “bears”. As traders Marex Financial point out: “Everyone is trying to pick the top.” The hedging issue is raised at Japanese broker Mitsui. Its head of precious metal research, Edel Tully, says it was inevitable that the rate of de-hedging would slow.

Last year the gold price was helped by production falling to a ten-year low. At the moment world gold production is expected to be roughly stable. Less from South Africa, more from Australia, and merging producers like China. That may change.

Still, the dollar is key. UK bankers HSBC put it succinctly: “We have long maintained that the US dollar is the primary influence in determining gold prices.”
Complaints about the effect of the lower dollar on export markets are coming from Europe and China. Will Washington listen when there is an $800 billion-a-year current account deficit to worry about? Undoubtedly not!

So, not many points to trigger profit-taking, then.

Gold:The price is surging so fast, its hard to keep!!

2007-11-10T04:29:00.000-08:00

Courtsey:Rob Mackrill

The price of gold is surging higher so fast, it's hard to keep up. At time of writing it is at $843, only $7 short of its all time high. The price is being stoked by Morgan Stanleys talk of a more violent correction in the dollar, says a note from Gold Investments. Also, comment from Cheng Siwei vice-Chairman of the National Peoples Congress, that reserves should be diversified out of the dollar into other stronger currencies. That is expected to include gold - an intention that will be helped by its increasing domestic mining production.
************************************************************************************
‘Oil and gold leap as investors flee the dollar,’ reads the Reuters headline.

Ah, the meat and two veg of the Daily Reckoning…

US light crude is just two bucks shy of the centurion. That is to say $100. Will it make it, we wonder?

Yes, said my oil trader friend last night. It will then fall back below, regroup and head higher still. Well that’s his bet anyway. But we tend to listen to his views closely given the last call was bullish at around the $60 level.

Worse he sees war coming and notes the oil coming out of Saudi is heavier these days, suggesting they’re getting towards the bottom of their vast but aging reservoirs. Saudi accounted for 13% of world production last year, but total production declined 2.3% over the previous year.

As for gold, the price is surging higher so fast, it’s hard to keep up. At time of writing it is at $843, only $7 short of its all time high. It’s already at all time nominal highs (ie not adjusted for inflation) and pushing higher against both the euro and pound, having hit €575 and £402 respectively.

The price is being stoked by Morgan Stanley’s talk of a more “violent correction” in the dollar, says a note from Gold Investments, as an FT headline warns of a possible fire sale of mortgage-backed securities. Also, comment from a senior Chinese politician, Cheng Siwei vice-Chairman of the National People’s Congress, that reserves should be diversified out of the dollar into other “stronger currencies”.

That is expected to include gold - an intention that will be helped by its increasing domestic mining production. The Chinese Gold Association expects to become the world’s number two producer this year, says an FT report and eventually top South Africa’s long held position as the world’s largest producer.

News of Cheng Siwei’s comments saw the dollar sink to 1.46 against the euro and $2.10 against the pound. This is the pound’s highest level against the greenback since 1981.

Yesterday was a pretty good day to hold a conference devoted to ‘poor man’s gold’. As silver hit a 27-year high at $15.50 there were some cheerful faces at London’s Silver Summit. It did even better this morning, topping $16.

With gold making the headlines, silver doesn’t get a lot of attention. You may be surprised to learn that the its price appreciation in the past couple of years has actually exceeded that of gold claims Rolf Nef, a Swiss fund manager with the kind of jumbled English and wild glint in his eye that makes you think... here’s a maniac. However, from what we could make of the quickfire slide show we certainly suspect he’s on to something...

Nef is a Swiss money manager and runs a fund which boasts 50% of its holdings in physical gold and the balance in silver options.

His fund fact sheet begins:

“Investment Idea: The world is swimming in a sea of debt (circa. $120trn), growing every day, which creditors think is money. The most practical money without a counter party is gold and silver.”

You get the picture... He presented for the second year running. And his message was the same this year as last. Sell your house and buy gold and silver. He even asked the audience whether anyone had taken him up on the advice from last time. One hand went up… and he was smiling.

Wake up to Gold!!--Mark O' Byrne

2007-11-10T03:21:00.000-08:00

Successful investing is about the diversification and management of risk. In layman's terms this means not having all your eggs in one basket. We know from history that markets can and do occasionally crash and if you are not diversified, your nest egg can be severely affected. This principle is an important one and should be observed by all investors. A healthy portfolio includes a wide range of assets. Holding gold bullion in a portfolio can provide distinct benefits in the form of speculative gains, investment gains, hedging against macroeconomic and geopolitical risk and or wealth preservation.

One of the most well known auditors in the world is David Walker. He is the top auditor of the U.S. government - the Comptroller and Auditor General and the head of the non-partisan Government Accountability Office (GAO). He cannot be pigeon-holed as a “doom and gloom merchant”.

Last March he was interviewed on CBS’ “60 Minutes". He said that politicians in Washington were "bankrupting America". He's now on a "Fiscal Wake-up Tour” across America taking his message directly to the people, as he feels that much of the media and politicians in Washington are ignoring the massive long term fiscal challenges facing the U.S.

This August he wrote apiece in the opinions/editorials section of the Financial Times where he outlined his concerns: "America is a great nation, probably the greatest in history. But if we want to keep America great, we have to recognise reality and make needed changes... There are striking similarities between America's current situation and that of another great power from the past: Rome.

"The Roman Empire lasted 1,000 years, but only about half that time as a republic. The Roman Republic fell for many reasons, but three reasons are worth remembering: declining moral values and political civility at home, an over-confident and over-extended military in foreign lands, and fiscal irresponsibility by the central government. Sound familiar?"

There are clear parallels between the huge challenges facing the US socially, politically and economically and those that led to the fall of the Roman Empire. With the emergence of rival superpowers such as China in the 21st Century, investors would be wise to be cognoscente of these big picture geopolitical trends and invest accordingly.

Successful investing is about the diversification and management of risk. In layman's terms this means not having all your eggs in one basket. We know from history that markets can and do occasionally crash and if you are not diversified, your nest egg can be severely affected.

This principle is an important one and should be observed by all investors. Most investors have most of their wealth in the stock and property markets. This strategy of having nearly all our eggs in these baskets has been successful in recent years. However, past performance is no guarantee of future returns and there are increasing signs that it would be wise to reduce allocations to these asset classes and look at other asset classes.

A healthy portfolio includes a wide range of assets including a properly diversified residential and commercial property portfolio; a variety of equities with exposures to different market sectors and regions; a small allocation to a variety of conservative government bonds; a ‘rainy day’ cash component and a 10-15% allocation to gold bullion.

Holding gold bullion in a portfolio can provide distinct benefits in the form of speculative gains, investment gains, hedging against macroeconomic and geopolitical risk and or wealth preservation. Importantly, gold is the only asset class with an inverse or negative correlation to the US dollar and to conventional assets such as bonds, stocks and property all of which are denominated in fiat paper currencies such as the US dollar, the Euro and the British pound.

Traditional asset allocation theory, as represented by the investment pyramid, advocates higher risk speculations at the top, with lower risk assets at the bottom. Futures contracts, options, individual shares and spread betting should be placed at the top of the pyramid, while cash equivalents and physical bullion, either fully allocated or delivered (as is done by the world’s Central Banks) should form the foundation or base.

In dollar terms, gold returned 24.75% in 2006, rising from $497 to $620 per ounce. It thus completed its 5th year of gains and is up by more than 160% in the last 5 years. So far in 2007, gold has returned 22.5% in dollar terms, rising from $620 to $760 per ounce.

Most commodity analysts remain bullish on both gold and particularly silver and believe that they are now both in multi-year bull markets. Commodities, like all asset classes follow long term economic cycles. Commodities increased in value in the late 1960’s and 1970’s. They broadly declined in value in the 1980’s and 1990’s and have been rising again since 2001.

We are not as confident on the outlook on some commodities such as base metals and some soft commodities which are more cyclical in nature and would likely be affected by a slowdown in the U.S. and global economy. Gold on the other hand is not solely a commodity but more importantly a universal finite currency held by every Central Bank of note in the world.

It is the only currency academically proven to have an inverse correlation to conventional assets such as bonds, equities and property. We believe gold will surpass its non-inflation adjusted high of $850 per ounce by early 2008 and its inflation adjusted high of some $2,400 per ounce in the next 10 years.

Highly respected analyst, Louise Yamada sees gold surpassing $730 this year on its way to $3,000 within a decade. “Gold is the purest play against the dollar,'' said Louise Yamada, managing director of Yamada Technical Research Advisors and former head of technical research at Citigroup. Yamada was voted Wall Street’s best technical analyst from 2001 to 2004.

Among the world's biggest financial institutions such as JPMorgan Chase & Co., Merrill Lynch and UBS, gold is also favoured by their analysts. Deutsche Bank AG's chief metals economist, Peter Richardson, made gold his favourite pick for 2007. “If you can only make one commodity investment,'' gold is the “choice for 2007.”

Gold is becoming Wall Street's darling again due to what Bloomberg's Pham-Duy Nguyen said was “the swooning U.S. dollar, which has become a proxy for the slowing American economy and the nation's humiliating lack of success arranging regime change in Iraq, banning weapons of mass destruction in North Korea and Iran and reducing its trade and budget deficits."

The fundamental reasons for owning gold and silver in the last five years have not changed, indeed most of them have become stronger:

Demand factors:

.A record and unprecedented US trade, budget & current account deficits.
.Rising oil & energy prices with the consequent inflation and gradual realisation that ‘Peak Oil’ is a reality.
.Overvalued, plateauing and falling property markets.
. Rising interest rates in the US and globally.
.Record consumer, mortgage and national debt levels in the US and much of the western world.
.Increasing pensions stresses from underfunding and the 'demographic time bomb' of retiring ‘Baby Boomers’.

The growing realisation of the long term impacts that global warming will have on all societies and economies as outlined in the Stern Report.

.Geopolitical instability and the ‘War on Terror'.
A depreciating and declining US dollar - the global reserve currency.

Increasing global investor demand for safe haven assets. Also, Central Bank demand for gold to provide currency backing and stability to monetary reserves.

Supply Factors:
.It is estimated that all of the above ground stocks of gold ever mined could fit into a 20 metre high cube. Gold is thus very rare and in limited supply.
.Gold production is stagnating and gold output in the leading gold producing countries continues to stagnate despite higher gold prices. This is leading geologists to wonder whether we have reached the point of peak gold production.
.It takes 10-15 years to take a mine to production and many mines have closed down in recent years.
.High energy prices make mining an expensive proposition.
Environmental legislation stymies mine development.
Many mines are in unstable countries and regions such as South America, Africa, the Middle East and Russia.
.Central banks sales have slowed and in some cases reversed; the Argentinian, South African, Russian and Chinese central banks are some of the more significant buyers of gold in recent months.

Investing in gold bullion has its tax attractions too. The EU harmonised the treatment of gold for investment purposes in 2000 with the introduction of the EU Gold Directive. It means that investment grade gold bullion for investment is now tax free throughout the EU. There is no VAT and gold bullion is stamp duty exempt (unlike property and equities) throughout the EU. The only tax applicable is capital gains tax which is applicable on the majority of investments.

Importantly, residents of the UK, can invest in gold bullion in their pension funds. As of April 2006 they can invest in gold bullion through their Self-Invested Personal Pensions (Sipps). US citizens can already do so in their Individual Retirement Accounts (IRA’s).

Gold bullion is allowed in a pension fund providing it is investment grade gold which is gold of a purity not less than 995 thousandths or 99.5% pure and that the bullion must be immoveable and stored with a secure and regulated third party. It cannot be taken in physical possession and used as a “pride in possession” asset.

The Perth Mint Certificate Programme, as the only government-owned and run gold certificate programme in the world, fulfills this criterion. It is the oldest operating mint in the world (established 1899) and has an AAA rating from Standard and Poor’s and as such is a legitimate way UK investors can invest in gold bullion within their Sipp.

Risk conscious investors have long known that gold is a sound investment choice. Gold is stable in times of global geopolitical instability and when economic uncertainty, recessions and depressions prevail. Used correctly, gold and silver can be highly effective components of a properly diversified investment portfolio.

Gold remains an under-appreciated, under-owned and undervalued asset. Most investors remain ignorant about gold and sometimes fundamentally misunderstand it. At the beginning of the 1970s, when gold was about to undertake its historic move from $35 per ounce to $850 per ounce for a return of nearly 3000% in the subsequent 10 years, the same observations would have been valid. The only difference between then and now is that the fundamentals are actually even stronger today.

While the U.S. is unlikely to go the way of Rome anytime soon, the significant long term fiscal challenges facing the U.S. as outlined by the Comptroller General, David Walker, suggest some diversification into gold makes sense.

Gold: The Anti-Dollar Cash Position-Lord William Rees-Mogg

2007-11-10T03:05:00.000-08:00

Nils Taube has set up a new open ended investment company, S&Ws Taube Global Fund. At present almost 15% of the fund is in cash after the fall of the U.S. subprime lending market. It is heavily weighted in gold, with about 8% of the fund in gold bullion and 12% in gold shares. In all, just over 30% of the fund is invested in energy stocks, including oil and gas. Obviously, this balance of the portfolio shows that Mr. Taube has, once again, got major trends right. He will not have lost money in financial shares. He will have benefited from the rise in oil and gas prices and the gold price.

I have known Nils Taube, the London fund manager, for over fifty years. He has a unique long term track record since I first met him as a young partner in Kitcat and Aitken, a pre big bang firm of London stockbrokers. In the 1980s we were both members of one of Jacob Rothschild’s boards.

Last April, Nils, who is in his late seventies, set up a new open ended investment company, S&W’s Taube Global Fund, which currently has £40 million under management. The Financial Times devotes most of Ellen Kelleher’s Fund Focus column of October 24th to the current policy of the Taube Global Fund. This is an opportunity to study the current strategy of an outstanding investor.

Nils Taube has always been particularly good at making money in difficult periods. He has a temperament which could be described as one of realistic optimism, and has never been a “gloom and doom” investor. This makes it more significant that he has structured Taube Global so that the fund is strongly defensive.

At present almost 15% of the fund is in cash after the fall of the U.S. subprime lending market. It is heavily weighted in gold, with about 8% of the fund in gold bullion and 12% in gold shares. The FT quotes Mr. Taube as saying “we regard gold as an anti-dollar cash position”. There is an exposure to Japan and to energy stocks, including BP and Shell and United Tar Sands, the Canadian tar sands group. In all, just over 30% of the fund is invested in energy stocks, including oil and gas.

Nils Taube is at present suspicious of investment in banking and financial companies. He sets a high standard of liquidity for his investments so that he can trade in and out of them quickly. He is avoiding the shares of companies which rely on credit, “no matter how sound these investments may appear on paper”.

Obviously, this balance of the portfolio shows that Mr. Taube has, once again, got major trends right. He will not have lost money in financial shares. He will have benefited from the rise in oil and gas prices and the gold price. What I find significant, having known his investment response to the varying markets of over half a century, is that he still feels so cautious.

If he is right now, then the oil price is likely to remain high, and may go much higher, the gold price is in a long term bull market, yet the credit market will remain volatile and uneasy. Nils was getting his major calls right in the very difficult and inflationary decade of the 1970s. I suspect that he is again getting his calls right.

Commodity Market Cycles-Dr.Marc Faber

2007-11-10T02:52:00.000-08:00

I have great sympathy for the view that over the last 200 or so years investments in commodities performed poorly when compared to cash flow-producing assets such as stocks and bonds. I also agree that, as the team at GaveKal suggests, "every so often, we experience a massive break higher in commodity prices in which commodity indices triple in less than three years," which is then followed by a period of poor performance.

Still, we need to ask ourselves why in the last 200 years, commodities, adjusted for inflation, were in a continuous downtrend and whether it is possible that something might have changed in the last few years, which would suggest that this downtrend is about to give way to a sustained out-performance of commodities compared to the US GDP deflator.

The other question is of a more near-term nature. Should commodities, having approximately trebled in price since 2001, be sold, or should we expect far more substantial price increases? I have to confess that I have little confidence that I can answer these questions satisfactorily. Still, the following should be considered.

In the 19th century, and for most of the 20th, industrialization was concentrated in a few countries, which for simplicity we shall call the Western industrialized world. The world's economy was at the time characterized by an abundance of land, resources, and cheap labor (certainly in the colonies and later in the developing countries) and a relatively limited supply of manufactured goods. At the same time, growth and progress was concentrated among a very small part of the global economy - either in the Western industrialized countries or among a tiny part of the population (the elite) in developing countries. In addition, there were hardly any other sectors in the economy where productivity improvements were as high as in agriculture and mining. These factors - abundance of land, labour, and resources combined with huge productivity improvements and limited demand from the then still small industrialized world - may, at least partially, explain why commodity prices failed to match consumer price increases for much of the last 200 years.

Remember that, in the first half of the 19th century, manufacturing was concentrated in England with a tiny population, while the British Empire could draw on the supply of commodities from an enormous territory. Then, in the second half of the 20th century, we experienced the socialist and communist ideology, and in India policies of self-reliance and isolation.

Commodity market cycles: Socialism and communism
As a result, about half the world's population remained largely absent as consumers of goods. (How many motorcycles and cars were there in the Soviet Union, China, India, and Vietnam 25 years ago?) But, while largely absent as consumers, people in these countries continued to produce raw materials and agricultural products. Therefore, I suspect that the removal of approximately half the world's population as consumers through socialism and communism may have been an important factor in the poor long-term performance of commodities compared to the US GDP deflator, and other assets such as equities.

Since the breakdown of communism and socialism, the world's economic fundamentals seem to have changed very importantly. Initially, the impact of the end of socialism was muted. Production shifted to China, but as had been the case with production shifting from the West to Japan, South Korea, and Taiwan between 1960 and 1990, rising industrial production in former communist countries largely substituted for production in the West. But over time, in countries such as China, rising investments and industrial production boosted real per capita incomes considerably and made way for a tidal wave of new consumers. In turn, these additional new consumers lifted industrial production further in order to satisfy not only the demand from their export markets but their own needs as well.

Thus, industrial production and capital spending increased further. This led to additional income and employment gains, further domestic demand increases and so on (multiplier effects).

Commodity market cycles: Shifting demand
In short, the opening of China and of other countries has permanently shifted the demand curve for consumer goods and services (for example, transportation) to the right and along with it the demand for industrial commodities and, notably, energy. Now, if all goes well in India (a big if, I concede), then the demand for goods, services, and hence commodities will continue to increase very substantially for another 10 to 20 years.

Indian oil consumption has just recently started to turn up. Should its demand now accelerate, as we believe it will do, it is very likely that China's and India's oil demand could double in the next eight years.

There are a few more points to consider. For much of the last 200 years, developing countries, where many of the world's natural resources are located, had trade and current account deficits with the industrialized world. These deficits were a constant drag on these countries' ability to accumulate wealth. But now, through its current account deficit, the United States is shifting around $800 billion annually to the economically emerging world.

This represents a huge shift in wealth from the rich United States to the current account surplus countries. That this shift in wealth stimulates their economies and consumption, and along with it their own demand for commodities, should be clear. (Rising domestic energy demand in Indonesia amidst falling production has turned the country into an oil net importer!) Now, for most countries a current account deficit the size of that of the United States would lead to some sort of crisis (for example, the Asian crisis of 1997) and then to a curbing of consumption. However, in the case of the United States, which is endowed with a reserve currency, trade and current account deficits are simply financed by "money printing."

Commodity market cycles: Global economic expansion
So, at least for a while (but not forever), the shift in wealth to the emerging world won't have a negative impact on America's economy and consumption. And, at least for now, rising demand and wealth in the rest of the world won't be offset by declining demand and shrinking wealth in the United States. On the contrary, the global imbalances arising from "over-consumption" in the United States have brought about a global economic expansion, which, while unsustainable in the long run, is nevertheless firing on all four cylinders at present. Simply put, the excess liquidity which the Fed has created - and which it is still creating, I might add - has led to a global and synchronized economic boom. (If money were tight, the asset markets wouldn't rise.)

The following point regarding the demand for commodities is frequently overlooked. In the developed countries, commodities account for a very small part of the economy. As a result, price increases for oil and other commodities have a very minor impact on growth rates and on consumption. However, in the commodity-producing countries (Middle East, Africa, Russia, Latin America), commodity production is an important part of the economy.

So, when commodity prices rise, their economies are, as in the case of the Middle East, turbo-charged. GDP per capita then soars and leads to a consumption and investment boom, which then increases these countries' own demand for commodities. This is particularly true for resource-rich countries that have a large population and also explains why, in the 19th century, when agriculture was still the dominant sector in the US economy, rising grain prices led to economic booms, while declining commodity prices were associated with crises. (In recent years, financial markets have begun to have a similar impact on economic activity as agriculture had in the 19th century: rising stock markets = boom; falling stock markets = bust.)

In sum, we could argue that the emergence of a large number of new consumers in the world following the breakdown of communism, expansionary monetary policies in the United States, which have led to a rapidly growing current account deficit, the US dollar's position as a reserve currency, which enables the Fed to create an almost endless supply of dollars, and new demand from the commodity producers themselves, have all led to a significant increase in the demand for raw materials.

I am not predicting here that, from now on, the demand for commodities will always outstrip the supply. In time, new technologies (in particular, in the filed of nanotechnology), which will permit resources to be used more efficiently, and conservation will curtail demand for raw materials. But until the effects of these factors kick in, a tight balance between rising demand and existing supplies could remain in place for quite some time.

Basic Guide to Commodities Trading!!

2007-11-08T09:59:00.002-08:00

If you're new to the world of commodity trading, fear not, because using the platform in India is not beyond anyone's grasp or capability -- it's only a matter of making a beginning somewhere.

If you want to clarify some basic doubts but were afraid to ask, here's your chance to catch up on lost time. Below are some answers to some frequently popped questions.

The basic difference between the commodity exchange and stock exchange is that in a commodity exchange, actual physical products that are non-financial in nature are traded.

These include agricultural products such as wheat, castor, groundnut or sesame and industrial products such as aluminum, zinc, nickel and also precious metals like gold and silver.

In comparison, a stock exchange offers all financial products such as stocks, indexes, interest rate, and government securities.

Trading in any contract month will open on the 21st day of the month, 3 months prior to the contract month. For example, the December 2004 contract opens on 21st September 2004.
In commodities, the 20th day of the delivery month would be the due date. If the 20th happens to be a holiday then the due date would be the previous working day.
Typically, the margins for trading vary from commodity to commodity. For a more liquid commodity like gold or silver the initial margin and the exposure margin would be typically 4 per cent each. However, in other commodities the margins could vary depending on volatility of the commodity prices.
The pay-in (T+1) will be on or before 11.00 a.m., payout on or after 12.00 noon.
All contracts settling in cash would be settled on the following day after the contract expiry date.
Deliveries are not compulsory. The buyer and the seller would have to express their intentions while to give or take delivery entering the contract. The exchange would match the deliveries at the client level. Contracts that are not assigned delivery are settled in cash.
In case of physical delivery, a receipt from the warehouse where the goods are stored is issued in favour of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse.
Where settlements go, for open positions at the beginning of the tendering period of the contract the buyer and the seller can give intentions for delivery.

Intentions for delivery could be given right until the final day on which that the contract expires. Delivery would take place in electronic form (in the national level exchanges). All other positions would be settled in cash.

Any buyer would have to put in a request to take physical delivery to its depository participant, who would pass on the same to the warehouse manager. On a specified date, the buyer would have to go to the warehouse and pick up the physical delivery.
The seller intending to make delivery would have to take the commodity to the designated warehouse. These commodities would have to be certified by an exchange-specified assayer.

The commodity that is meant for delivery would have to meet the contract specifications with a certain allowance for variances. If the commodity meets the specifications, the warehouse would accept it.

Warehouses would further ensure that the receipt is updated in the depository system, giving the due credit in the electronic account.

Also, every client who would want to give or take delivery would have to get registered as per the prevalent sales tax rates in his or her state.

Armed with the basic information, any trader should be ready to take the leap!

Are you new to Commodities Trading?

2007-11-08T09:28:00.000-08:00

Why Commodities

Investors looking for a fast-paced dynamic market with excellent liquidity can now trade in Commodity Futures Market.
Commodity is an asset class that is negatively correlated to equity markets & this feature helps in providing diversification to one’s portfolio.
Commodities tend to be less volatile than equities & the margins to be paid upfront are lower than in equity F & O Markets. This gives the trader/investor more Leverage & better risk-adjusted returns.
Hedging: Mitigate your risk of commodity price fluctuations.
Arbitrage Opportunities: Take the advantage of price spreads, calendar spreads.
Prices are pegged to International Markets of NYMEX, CBOT, CME, LME.

National Level Commodity Exchanges In India Offering Trading Facilities In Multiple Commodities.

National Commodity & Derivatives Exchange (www.ncdex.com)
Multi Commodity Exchange of India Ltd. (www.mcxindia.com)

Intra Day Fluctuations In Commodities Market
All major international commodity markets have an impact on the price fluctuations of Indian Commodities market. The timings of the same is as mentioned below.

Tokyo: 5:00am – 10:30am
Hong Kong: 6:30am – 12noon
Singapore: 8:00am – 1pm
London Metal Exchange: 1:50pm – 10:00pm
New York Mercantile Exchange: 5:50pm – 11:30pm
India (MCX & NCDEX – Metals& Energy): 10:00am – 11:30pm
India (MCX & NCDEX – AGRI): 10:00am – 5:00pm

How Is Commodity Derivatives Market Different From Equity Derivatives Market

Underlying Asset
Commodity Derivative:The underlying is a commodity.
Equity Derivative:The underlying is equity

Research
Commodity Derivative:Research is global. It requires study of macroeconomics of world economies & demand supply situations.
Equity Derivative:Research requires study of Balance Sheets, P/E Ratios etc

Trading Hrs.
Commodity Derivative:10am to 11:30pm
Equity Derivative:10am to 3:30pm

Settlement
Commodity Derivative:Cash or Delivery based settlement.
Equity Derivative:Cash Settled

Volatility
Commodity Derivative:Low
Equity Derivative:High

Leverage
Commodity Derivative:High
Equity Derivative:Low

Demat A/c
Commodity Derivative:Required only for deliveries.
Equity Derivative:Mandatory

Initial Margin
Commodity Derivative:5 to 10% of the contract value.
Equity Derivative:Approx. 25% of the contract value.

Price Movement
Commodity Derivative:Purely based on demand & supply.
Equity Derivative:Based on expectation of future performance.

Which Commodities Are Available For Trading

Precious Metals Gold, Silver
Base Metals Steel, Copper, Aluminum, Zinc.
Energy Crude Oil, Brent Crude Oil, Furnace Oil.
Cereals & Pulses Wheat, Rice, Chana, Urad, Tur, Guar, Guargum, Soyabean
Condiments Sugar
Cash Crops Cotton, Jute
Oil Complex Castor, Soya, Mustard, Mentha Oil
Spices Chili, Turmeric, Jeera, Pepper

Commodity Margins & Lot Sizes
The margin ranges between 5% to 10 % of the contract value.

However the change in value of commodity from the price at which you made the Purchase/sale with reference to the daily settlement price reflecting a proportionate Gain or loss. The loss, if any has to be paid up as Mark to Market Margin

Commodity Lot Size Margin (Rs.)
Gold 1Kg 70,000
Silver 30Kg 50,000
Gold Mini 100gms 25,000
Silver Mini 5Kg 25,000
Copper 1MT 40,000
Crude Oil 100 Barrels 25,000
Soyabean 10MT 10,000
Urad 10MT 35,000
Chana 10MT 20,000
Sugar 10MT 20,000
Jeera 3MT 25,000

Return on Investment

Commodity Average Intra Day Movement Return (Rs.)
Gold Rs. 60 – Rs. 100 Rs. 100 / 1 Rupee Movement
Silver Rs. 100 – Rs. 300 Rs. 30 / 1 Rupee Movement
Crude Oil Rs. 30 – Rs. 60 Rs.100 / 1 Rupee Movement
Urad / Chana Rs. 40 – Rs. 60 Rs. 100 / 1 Rupee Movement
Sugar Rs. 15 – Rs. 25 Rs. 100 / 1 Rupee Movement
Mentha Oil Rs. 10 – Rs. 30 Rs. 360 / 1 Rupee Movement
Copper Rs. 3 – Rs. 8 Rs. 1000 / 1 Rupee Movement
Zinc Rs. 2 – Rs. 5 Rs. 5000 / 1 Rupee Movement

Is there Danger in this Gold Run??

2007-11-07T00:33:00.000-08:00

Author: Boris Sobolev

While many market observers are waiting for a correction, gold is pushing relentlessly higher. After it powered through $700/oz, pullbacks on gold became short and shallow. A correction in gold will no doubt come, but we are not willing to bet money on how soon it will occur and how serious it will be.

The weekly chart of gold below shows an overbought condition but a year and a half ago gold was far more overbought time-wise and price-wise. By following the 2003 and 2005 gold rally patterns we can expect a few more months of handsome gains before this rally in the secular gold bull market is over. Any correction at this point would be a healthy sign.

What if, however, we are wrong and gold is now, in fact, making a final spike to its all time high of $850 or higher. The aftermath, as after the top in 1980, could be severe and it would be time to sell? Is this a real possibility?

No, the situation today is completely different:

In August 1979, Paul Volcker became the chair of the Federal Reserve and start to fight inflation by radically raising interest rates. Today, Chairman B. Bernanke, in an effort alleviate the pain in the ailing banking system, is aggressively lowering interest rates.
28 years ago, the United States was the biggest creditor nation in the world. Now, the opposite is the case – US is the largest debtor. This, along with the Fed policy is causing the dollar to fall to historic lows.
Gold may appear to be overextended but this is not the case in real terms. In fact, gold should be around $3,000/oz in order to reach its inflation adjusted highs. Only then will there be a real reason to worry about a possible end of the gold bull market.

Pulses market turning potentially explosive!!

2007-11-06T10:53:00.000-08:00

Rising global grain prices, weakening dollar and firmer ocean freight rates have combined to make pulses imports more expensive. The landed cost is today about Rs 4,000 a tonne higher than it was a few months ago. For instance, for green and yellow peas, importers pay over $450 a tonne, that is at least $100 a tonne more than they did say three months ago. The firming rupee means that Indian importers pay slightly less in rupee terms against dollar contracts; but the overall adverse effect of rising grain prices on the Indian pulses market is clearly visible.

Domestic prices of green and yellow peas are currently at over Rs 18,000 a tonne, up from close to Rs 15,000 a tonne three months ago.Price rise is seen in other pulses too. The threat of a further rise in pulses prices is real, as the demand-supply fundamentals of the pulses market are getting tighter by the day.

Risk premium
Worse, overseas suppliers dealing with India build into their price what is called a `risk premium'. There are risks associated with supply of pulses to India; and one of the major risks is the risk of rejection at the point of entry on plant health grounds. Stem and bulb nematode is one of them. Currently, Indian phyto-sanitary
regulation requires that overseas suppliers fumigate the consignment with methyl bromide. But this fumigant is hardly used in developed countries as it has been phased out.

This condition exposes the overseas supplier to the risk of rejection of cargo on arrival at the Indian port. Exporters say the extant quarantine conditions are too onerous for them to be able to do business with India freely. It is also reported that other importing countries in Asia – China, Pakistan, Bangladesh – do not impose such stringent conditions as India does. One must, however, hasten to add, as an agrarian economy and world's largest producer (13-14 million tonnes), consumer and importer (2.0-2.5 million tonnes) of pulses, India has much at stake as far as agriculture is concerned.

Entry of exotic pests and diseases through the import route can potentially ruin the already fragile Indian agriculture. At the same time, widening demand-production mismatch in pulses has pushed market prices up. Poor consumers are the worst hit. Pulses are the cheapest vegetable protein for poor consumers; yet, per capita availability of pulses has steadily declined over the years.

Govt dilemma
The Government is caught in a dilemma. Import volumes are expanding and imports are an absolute necessity to contain price rise. But the risk of nematode infestation is real too and needs to be managed scientifically, without jeopardizing domestic farming. At the same time, the market would be unwilling to wait. Overseas suppliers
continue to scout for other import-friendly markets.

Some practical solution would be in order. India is currently undertaking a pest risk analysis (PRA) for stem and bulb nematode. The exercise is likely to be completed in the coming months. However, until such time the PRA has been completed and appropriate measures to deal with the identified risks have been developed and implemented, India's pulses imports remain at risk. An interim measure, according to grain sector experts, is that while India should continue the current practice of fumigating imported pulses on arrival in the country, Indian plant quarantine authorities can insist on certificate of test and clearance at the port of loading itself from the supplier country official agency.

For instance, Canada, the largest supplier of pulses to India, has an official agency known as Canada Food Inspection Agency (CFIA), which can conduct tests on basis of pre-agreed sampling and testing methods to certify the safety of consignments.

In any case, on arrival, the Indian Government can make random checks to ensure that imports conform to domestic regulations. Such a move, market participants assert, will considerably reduce the risk faced by overseas suppliers and would bring down the risk premium Indian importers are currently paying.

Quarantine issue
The quarantine issue deserves the most urgent attention for another reason. There is a strong possibility that pulses planting in the upcoming rabi season (summer harvest) would take a hit. Growers are likely to plant more of oilseeds and grains (other than pulses). Minimum support price for wheat has been hiked to a record level of Rs 1,000 a quintal (about $250 a tonne).Worse, in Punjab, Haryana, Uttar Pradesh and parts of Madhya Pradesh and Rajasthan, the soil moisture conditions are less than satisfactory. Farmers are unlikely to take a chance with pulses, but are more likely to favour wheat and rapeseed/mustard.

Output and yield
Output and yield will depend on the quantum of winter rains. Into 2008, pulses prices have a strong upside risk; and the market is turning potentially explosive for reasons both domestic and international.

Major origins such as the US, Canada, Australia may harvest less. If New Delhi wants pulses prices to stay under control, the only way is to augment supplies through imports, and by adopting clearance procedures that are practical and effective without hampering smooth flow of goods.

It is also necessary to review the role of Government parastatals in pulses import. Brave statements of intention to import large quantities do not help any one but the overseas suppliers to further jack up prices. State agencies enjoy a 15 per cent subsidy on pulses import.

This concession is not only unjustified but also distorts the market.In importing pulses and selling in the open market, State agencies discharge a commercial function like any other private trader. There is no justification to treat them preferentially by granting ad hoc concession.

World pepper output likely to drop in 2008

2007-11-06T10:43:00.000-08:00

Demand-supply gap seen at 55,000 tonnes

Kochi, Nov. 5 World pepper production is projected to be lower in 2008 at 2,62,400 tonnes as against 2,72,040 tonnes in 2007 and 2,89,230 tonnes in 2006 following weak crop in India, Brazil, Indonesia and Vietnam.

According to the International Pepper Community, there could also be a fall in the carry forward stock which is projected at 61,719 tonnes in 2008 as against 73,404 tonnes in 2007 and 88,384 tonnes the previous year.

Total exports during the current year is estimated at 2,01,700 tonnes as against 2,45,741 tonnes last year while the projection for 2008 has been put at 1,90,800 tonnes. It is against an estimated demand of 2,45,000 tonnes and hence, there could be a gap of around 55,000
tonnes between demand and supply next year.

Though the Indian production has been projected at 50,000 tonnes by the IPC, according to farmer groups it is likely to be around 45,000 tonnes. They attributed the decline to continuous rains in the Madikeri region of Karnataka resulting in severe berry drop. A major planter and agriculture scientist, Dr Jacob Thomas, told Business Line on Thursday that he anticipated a decline of 20-30 per cent in output of the current crop which is expected to be harvested in
December.

He said there were very few pure pepper plantations. Pepper is mainly grown as an intercrop in the coffee estates. Therefore, it is under tree shades without any chances of getting sun light. "The berry drop in these plantations has been severe," he said. However, he ruled out delay in harvesting given the current favourable weather conditions as the berries require sunlight for a fortnight for maturing.

Karnataka normally produces 20,000 – 22,000 tonnes of black pepper annually and because of the berry drop it is likely to be in the range of 15,000 – 16,500 tonnes.

According to farmer sources in Kerala's Wayanad and Idukki districts, the main growing areas in the State, there could be marginal decline because of heavy rains this year. Output in Kerala, they claimed, could be around 25,000 tonnes, while the Tamil Nadu production is estimated at 5,000 tonnes. Thus, the total output of the current crop might hover around 46,500 tonnes, they claimed.

Besides, according to Dr Jacob Thomas, there could be an estimated stock of 4,000 tonnes in Karnataka as the major growers are holding back their produce anticipating the prices to cross Rs 150 a kg in November. "There won't be a distress sale this year because of good coffee prices apart from writing off of coffee loans by the Karnataka Government," he said.

Trading sources estimates put the output for 2008 at 40,000–45, 000 tonnes while the IPC estimates placed it at this year's level of 50,000 tonnes.

The domestic consumption in India for the current year is estimated at 55,000 tonnes while for 2008 it has shown a drop of 10,000 tonnes to 45,000 tonnes, probably anticipating an increase in prices and consequent consumer resistance.

According to market sources, the current situation is favourable for more imports of pepper. Availability of lower grade pepper in other origins at low prices as against high domestic price due to tight supply, appreciation of rupee against dollar and availability of overseas advances at low rates of interest have placed importers in the country at advantageous position, they said.

In the world scenario, Brazilian output in 2008 is projected at 33,000 tonnes as against 36,000 tonnes in 2007 while Indonesian production is at 20,000 tonnes compared to 25,000 tonnes this year.

Vietnam production is also projected to be less by 10,000 tonnes at 80,000 tonnes from 90,000 tonnes in 2007. In 2006 Vietnam produced one-lakh tonne of pepper.

However, Malaysian production is likely to be at 23,000 tonnes as against 20,000 tonnes this year while that of Sri Lanka is projected to be marginally up at 14,900 tonnes compared to 14,640 in 2007.

Courtsey:Business Line

Why Silver is a better investment than Gold?

2007-10-12T10:07:00.000-07:00

Silver has all the same monetary properties of gold, and more!

The historic price ratio of silver to gold shows that about 10 ounce of silver would buy one ounce of gold, a 10:1 ratio. Recently, the ratio is about a 50:1 ratio (with silver at $13/oz., and gold at $650/oz.) As the silver to gold ratio returns to historic values, from 50:1 to 10:1, you may make over 5 times more money investing in silver, than gold!

Silver prices may rise to exceed the 10:1 ratio, for the following reasons:

More than all of the silver produced by the mines each year is consumed by industry, which leaves little to no room for substantial investment demand. The tiniest bit of investment demand will drive prices sky high.

Supply prices aren't going anywhere. Higher prices in silver may not cause increased supply (production). Why not? Because most silver is produced as a by-product of mining gold, copper, zinc, or lead. Thus, higher silver prices will not substantially increase the amount of silver mined each year. In 1980, when silver prices went up to $50/oz., less silver was mined than in 1979!

Demand prices aren't going anywhere either. Higher prices may not cause reduced demand (consumption). Why not? Because most silver consumed by industry is used in such tiny quantities in each application, such as in film or electrical contacts, that rising silver prices will not easily slow down the growing industrial demand.

Additionally, as paper money continues to fail, people will buy silver and gold without regard to price, or they will buy simply because prices are going up!

Each year, silver mines produce about 650 million ounces of silver, about 200 million ounces come from scrap recycling, and about 100 million ounces used to come from investor selling, or government selling. That's a total of about 950 million ounces. Of that, about 42% is consumed by industrial use, about 28% consumed by jewelry, 20% consumed by photography, 5% consumed in coins and medallions, and that's 95% of total available silver each year! This implies either a "surplus", or "investment demand", of about 5% of the total. Investment demand remains small, but is growing!

Due to silver use, or consumption, since the 1950's, silver may now be more rare than gold, in above ground, refined, deliverable, forms. It is estimated that there are about 200-300 million ounces of silver available to the market at the present time. There are about 125 million ounces of silver at the NYMEX, the big commodity exchange in New York.

Each silver contract at the NYMEX is a promise. There are too many contracts, too many promises to deliver silver that may not exist. Each contract is for 5000 ounces. There are often over 175,000 contracts for 5000 ounces, that's a total of 437 million ounces of silver, promised to be delivered. Yet the exchange has only about a third of that in real silver. How can they promise to deliver more silver than exists? If they fail to deliver silver, according to the promises and contracts that they have made, then confidence in the world's entire financial system may collapse. Industrial users of silver may have to shut down their factories. To prevent this, the users will bid silver prices much higher.

Due to the risk of default in the silver futures contracts, I suggest that you avoid buying futures contracts, avoid options, and avoid storing your silver with anyone else! Take delivery of your silver, and put your silver in your own safe!

Despite silver's intrinsic properties as money, silver began to lose its status as money starting in the late 1800's, as nations stopped using silver, and started using only gold as money. Over 100 years of this "demonetization" has caused a serious drop in silver's value, and this trend is about to be reversed as investors learn about silver's intrinsic properties (and market fundamentals) again.

In the end, as paper money fails completely, the neglect of silver's use as money will be over. Once again, silver will be valued based on other measures of value, such as a day's wage, or a ratio to gold. If silver exceeds its historic value, as I expect it will, due to the scarcity, from its importance in electronics and photography, then perhaps a silver dime, silver quarter, or silver dollar's worth of silver will be worth far more than a day's wage, as it once was.

How high will silver prices go? You do the math on what a day's wage should be, and you tell me!
Will people be hurt if silver and gold prices rise? Not you if you own some! But also, honest weights and measures used in commerce are supposed to produce prosperity for all of society, not poverty.

But you must act to benefit from this information.

Don't wait for silver to rise before buying it. Silver prices could rise by over $20/day to exceed $100/ounce at any time if large funds or billionaires buy with desperation.

Gold:A perfect Commodity for Futures Trading!!

2007-10-12T09:51:00.000-07:00

Gold is money, because of its fundamental nature.
Gold is liquid and easily traded, with a narrow spread between the prices to buy and sell (about 1%).
Gold is easily transportable, because it has a high value for its weight.
Gold is money because it is divisible, you can divide it into coins, or re-melt it into bars, without destroying it.
Also, gold is interchangeable. It can be substituted for another piece of gold with no hassle.
Gold is also nearly impossible to counterfeit, as genuine gold is easily recognizable.
When measured by weight, gold is easily countable, and verifiable.
Gold is money because it is a great store of value. It is not subject to decay, rot, or rust.
Gold has an intrinsic value, because it is rare, highly desired by the world over, and is a luxury item.

There is not a single other commodity with those attributes, except, perhaps, for silver. Since silver is less valuable than gold, and since gold is too valuable to be used for small transactions, there is potentially more monetary demand for silver. When gold becomes money again, silver will be desperately needed to make change. Platinum and palladium may come close to gold, but they are not so easily recognized by the masses, and are used mostly by industry.

Ethanol:No Sugar, No Oil

2007-10-07T09:57:00.001-07:00

One tankful of the latest craze in alternative energy could feed one person for a year

The growing myth that corn is a cure-all for our energy woes is leading us toward a potentially dangerous global fight for food. While crop-based ethanol -the latest craze in alternative energy - promises a guilt-free way to keep our gas tanks full, the reality is that overuse of our agricultural resources could have consequences even more drastic than, say, being deprived of our SUVs. It could leave much of the world hungry.

We are facing an epic competition between the 800 million motorists who want to protect their mobility and the two billion poorest people in the world who simply want to survive. In effect, supermarkets and service stations are now competing for the same resources.

This year cars, not people, will claim most of the increase in world grain consumption. The problem is simple: It takes a whole lot of agricultural produce to create a modest amount of automotive fuel.

The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year. If today's entire U.S. grain harvest were converted into fuel for cars, it would still satisfy less than one-sixth of U.S. demand.

Worldwide increase in grain consumption

The U.S. Department of Agriculture reports that world grain consumption will increase by 20 million tons this year, roughly 1%. Of that, 14 million tons will be used to fuel cars in the U.S., leaving only six million tons to cover the world's growing food needs.

Already commodity prices are rising. Sugar prices have doubled over the past 18 months (driven in part by Brazil's use of sugar cane for fuel), and world corn and wheat prices are up one-fourth so far this year.

For the world's poorest people, many of whom spend half or more of their income on food, rising grain prices can quickly become life threatening.

Once stimulated solely by government subsidies, biofuel production is now being driven largely by the runaway price of oil. Many food commodities, including corn, wheat, rice, soybeans, and sugar cane, can be converted into fuel; thus the food and energy economies are beginning to merge.

The market is setting the price for farm commodities at their oil-equivalent value. As the price of oil climbs, so will the price of food.

In some U.S. Cornbelt states, ethanol distilleries are taking over the corn supply. In Iowa, 25 ethanol plants are operating, four are under construction, and another 26 are planned.

Iowa State University economist Bob Wisner observes that if all those plants are built, distilleries would use the entire Iowa corn harvest. In South Dakota, ethanol distilleries are already claiming over half that state's crop.

The key to lessening demand for grain is to commercialize ethanol production from cellulosic materials such as switchgrass or poplar trees, a prospect that is at least five years away.

Malaysia, the leading exporter of palm oil, is emerging as the biofuel leader in Asia. But after approving 32 biodiesel refineries within the past 15 months, it recently suspended further licensing while it assesses the adequacy of its palm oil supplies. Fast-rising global demand for palm oil for both food and biodiesel purposes, coupled with rising domestic needs, has the government concerned that there will not be enough to go around.

Less costly alternatives

There are truly guilt-free alternatives to using food-based fuels. The equivalent of the 3% of U.S. automotive fuel supplies coming from ethanol could be achieved several times over - and at a fraction of the cost - by raising auto fuel-efficiency standards by 20%. (Unfortunately Detroit has resisted this, preferring to produce flex-fuel vehicles that will burn either gasoline or ethanol.)

Or what if we shifted to gas-electric hybrid plug-in cars over the next decade, powering short-distance driving, such as the daily commute or grocery shopping, with electricity?

By investing not in hundreds of wind farms, as we now are, but rather in thousands of them to feed cheap electricity into the grid, the U.S. could have cars running primarily on wind energy, and at the gasoline equivalent of less than $1 a gallon.

Clearly, solutions exist. The world desperately needs a strategy to deal with the emerging food-fuel battle. As the world's leading grain producer and exporter, as well as its largest producer of ethanol, the U.S. is in the driver's seat.

Ethanol:No Sugar, No Oil

2007-10-07T09:57:00.000-07:00

Basics of Commodities Trading!!

2007-10-07T08:54:00.000-07:00

Why Commodities

Investors looking for a fast-paced dynamic market with excellent liquidity can now trade in Commodity Futures Market.

Commodity is an asset class that is negatively correlated to equity markets & this feature helps in providing diversification to one’s portfolio.

Commodities tend to be less volatile than equities & the margins to be paid upfront are lower than in equity F & O Markets. This gives the trader/investor more Leverage & better risk-adjusted returns.

Hedging: Mitigate your risk of commodity price fluctuations.

Arbitrage Opportunities: Take the advantage of price spreads, calendar spreads.

Prices are pegged to International Markets of NYMEX, CBOT, CME, LME.

National Level Commodity Exchanges In India Offering Trading Facilities In Multiple Commodities.

National Commodity & Derivatives Exchange (www.ncdex.com)
Multi Commodity Exchange of India Ltd. (www.mcxindia.com)

Intra Day Fluctuations In Commodities Market

All major international commodity markets have an impact on the price fluctuations of Indian Commodities market. The timings of the same is as mentioned below.

Tokyo: 5:00am – 10:30am
Hong Kong: 6:30am – 12noon
Singapore: 8:00am – 1pm
London Metal Exchange: 1:50pm – 10:00pm
New York Mercantile Exchange: 5:50pm – 11:30pm
India (MCX & NCDEX – Metals& Energy): 10:00am – 11:30pm
India (MCX & NCDEX – AGRI): 10:00am – 5:00pm

How Is Commodity Derivatives Market Different From Equity Derivatives Market

Underlying Asset
Commodity Derivative : The underlying is a commodity
Equity Derivative :The underlying is equity.

Research
Commodity Derivative : Research is global. It requires study of macroeconomics of world economies & demand supply situations. Etc.
Equity Derivative :Research requires study of Balance Sheets, P/E Ratios

Trading Hrs.
Commodity Derivative: 10am to 11:30pm
Equity Derivative:10am to 3:30pm

Settlement
Commodity Derivative:Cash or Delivery based settlement.
Equity Derivative:Cash Settled

Volatility
Commodity Derivative:Low
Equity Derivative:High

Leverage
Commodity Derivative:High
Equity Derivative:Low

Demat A/c
Commodity Derivative:Required only for deliveries.
Equity Derivative:Mandatory

Initial Margin
Commodity Derivative:5 to 10% of the contract value.
Equity Derivative:Approx. 25% of the contract value.

Price Movement
Commodity Derivative:Purely based on demand & supply.
Equity Derivative:Based on expectation of future performance.

Which Commodities Are Available For Trading

Precious Metals Gold, Silver
Base Metals Steel, Copper, Aluminum, Zinc.
Energy Crude Oil, Brent Crude Oil, Furnace Oil.
Cereals & Pulses Wheat, Rice, Chana, Urad, Tur, Guar, Guargum, Soyabean
Condiments Sugar
Cash Crops Cotton, Jute
Oil Complex Castor, Soya, Mustard, Mentha Oil
Spices Chili, Turmeric, Jeera, Pepper

Commodity Margins & Lot Sizes

The margin ranges between 5% to 10 % of the contract value.

However the change in value of commodity from the price at which you made the purchase/sale with reference to the daily settlement price reflecting a proportionate gain or loss. The loss, if any has to be paid up as Mark to Market Margin

Commodity Lot Size Margin (Rs.)
Gold 1Kg 70,000
Silver 30Kg 50,000
Gold Mini 100gms 25,000
Silver Mini 5Kg 25,000
Copper 1MT 40,000
Crude Oil 100 Barrels 25,000
Soyabean 10MT 10,000
Chana 10MT 20,000
Sugar 10MT 20,000
Jeera 3MT 25,000

Return on Investment

Commodity Average Intra Day Movement Return (Rs.)
Gold Rs. 60 – Rs. 100 Rs. 100 / 1 Rupee Movement
Silver Rs. 100 – Rs. 300 Rs. 30 / 1 Rupee Movement
Crude Oil Rs. 30 – Rs. 60 Rs.100 / 1 Rupee Movement
Urad / Chana Rs. 40 – Rs. 60 Rs. 100 / 1 Rupee Movement
Sugar Rs. 15 – Rs. 25 Rs. 100 / 1 Rupee Movement
Mentha Oil Rs. 10 – Rs. 30 Rs. 360 / 1 Rupee Movement
Copper Rs. 3 – Rs. 8 Rs. 1000 / 1 Rupee Movement
Zinc Rs. 2 – Rs. 5 Rs. 5000 / 1 Rupee Movement

Yes, It's Gold's Day!!

2007-10-06T11:53:00.000-07:00

2007-09-13
By James West

You’ve been hearing it for years.

“Gold’s going to a thousand dollars an ounce!”

“Gold will outperform every other commodity this decade!”

“Gold could go to $5,000 an ounce!”

Well, it’s starting to happen. Gold hasn’t set any new records yet, but for the first time since the 1980s, gold is solidifying above $700 an ounce.

And everybody knows why. The house of cards that was easy credit, a massive trade deficit, and declining growth has all come crashing down. And as everybody keeps saying, it ain’t gonna end any time soon.

This index is made up of mortgage finance stocks, with some pretty big names in the industry heavily weighted. Fannie Mae is 11%, Freddie Mac is 9%, Washington Mutual is 8% and Countrywide Financial is 5%.

It is a bottom-line performance snapshot of home mortgages. Recently we saw mortgage default rates climb to a level in the third quarter that was 14% higher than the second quarter of 2007.

According to a report last week from the Mortgage Bankers Association:

“Delinquency and default rates on loans and personal bankruptcy rates are still at comparatively low levels--only 4.7% of all loans in the third quarter--but they have been rising rapidly over the course of this year. Other measures of financial distress are also pointing one way for American families--up. With all pieces of the trifecta staying in place, rising delinquency rates on mortgages may be the beginning of a trend toward more middle-class financial insecurity . . .

“The data on bankruptcy rates also show a worrisome trend over the course of 2006. Bankruptcy rates dropped precipitously in 2006 in the wake of large filings in 2005 just before the new bankruptcy law went into effect. However, from the first quarter of 2006 to the second quarter, the annualized personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew from 1.2 in 1,000 to 2.0 in 1,000--an increase of 33.7%. The bankruptcy rate in the third quarter stood at 2.2 in 1,000, an additional increase of 9.6% in that quarter alone.

“Middle-class families are caught between low income growth, a high debt burden, and rising interest rates--and for the moment, these ingredients are here to stay. The most recent third-quarter delinquency, default, and bankruptcy figures show that the dangers to middle-class economic security are not theoretical concepts. They are a harsh reality for a growing share of middle-class families.”

Countrywide announced Thursday that it had obtained another $12 billion in financing after borrowing $11.5 billion the week before and selling a stake to Bank of America for $2 billion.

You’ve got to ask yourself why an institution as blue chip as Bank of America would invest in the country’s largest home mortgage lender just when everybody else in the sector is running for the hills.

It seems quite apparent to me that the only way Bank of America is going to ensure a lower default rate on its inventory of ABCP is to make sure that the so called triple-A assets behind the deteriorating paper continue to be financed. So it logically the bank has decided it’s better to spend $2 billion than on an “investment” than to have an exponentially greater amount of debt go delinquent on its books.

Desperate times call for desperate measures, apparently.

Gold thus becomes more attractive. Crumbling credit availability means the oversupply of new housing and commercial real estate will curb demand, which will see prices drop. Larger institutional investors begin to see gold as a hedge against further US dollar drops and risk associated with credit.

Even Goldman Sachs has finally jumped on the gold bug bandwagon, publicly proclaiming that gold will reach $725 this year.

Meanwhile, central banks in the Middle East and Russia continue to add to their gold reserves, even while European and North American central banks keep selling. Many industry watchers think China is about to become a buyer of gold, as its massive reserves of U.S. dollars are looking like they could see pretty substantial devaluation in the months and years ahead.

Gold has doubled since 2002, even in the face of concerted central bank selling. When these banks start to run out of gold to sell, what will happen to the price-limiting effect of their selling? It’s not unimaginable that gold could then start on an even steeper upward trajectory with no ceiling visible.

And then there’s the gold “carry” trade. Gold is “borrowed” at a rate that is typically very low. The borrower sells the gold and invests the money in an asset that performs better than gold over time, then sells that asset and buys the gold back, supposedly at a profit.

This formula depends on a relatively stable gold price, because if the price of gold were to increase at a higher rate than the asset performance rate, a loss would be realized by the time the gold had to be returned.

So in this environment, nobody is going to want to lend or borrow gold, as its enhanced volatility represents elevated risk. Gold broke out of the year’s trading range to resume a bull market, moving quickly from $670 to $721 in just eight trading days. A 7.6% gain in such a short time certainly got the attention of anyone in the carry trade business. So that business, and its net downward effect on the price of gold, is over.

Some analysts from otherwise conservative institutions think gold will see $850 by the end of 2007 as a result of desperate covers on short positions as the rate of gold price increase intensifies.

Meanwhile, Gold Fields Mineral Services, a global metals consultancy based in London, forecasts that total world gold-mining production will slip in the second half of this year. Gold sales by central banks, it says, rose by a modest 4% between January and July compared with the same period last year. Sales of so-called “scrap” gold--mostly recycled jewelry--fell by more than one quarter, despite spot gold prices trading at their highest six-monthly average in history.

Gold jewelry owners worldwide, in other words, want to hold on to the metal as its price continues to rise.

I, for one, am making regular trips to my local bullion bank to empty my wallet of paper currency for gold coins and bars. Somehow, it just seems to make sense.

Buy Gold or Else!!

2007-10-06T11:20:00.000-07:00

Buying Gold is no Longer Advisable, it's a Must-2007-09-19
Courtsey:Goldworld

As the fundamentals driving gold straight north continue to gain intensity, the bottom line for those of us with capital tied up in other investments is that some gold in the portfolio is not merely advisable--it’s a must.

If you are a student of economic history, you will understand that in spite of the world’s abandonment of gold as the peg by which all currencies are measured, all currencies can still be measured in gold. That fact alone should amplify gold’s unassailable position as history’s value vault of last resort.

Alan Greenspan’s new book, which comes out tomorrow, points the blame directly at the Bush administration for abandoning “rigorous fiscal policy” in favor of misguided “easy money.”

Many commentators, however, blame Alan Greenspan for the current morass.

Their arguments suggest that if Greenspan hadn’t lowered rates so drastically in response to the dot-com meltdown, the current real-estate bubble bust and accompanying credit crunch would never have materialized.

That makes no difference now, though.

Countries who participated in the U.S. style of mortgages front-loaded with low interest rates are now having to devalue their currencies by pumping in paper to replace the even more nebulous ABCP which represented imaginary credit dollars. Those dollars are frozen in time as creditors wait with teeth clenched to see what rate of default falls out of raised rates of interest.

Admittedly, the assets backing even the sub-prime caliber of debt are not utterly worthless. But they’re surely not worth the value of the loans they’ve backed.

The yet-to-unfold problem here is that in the past, properties that were foreclosed upon found a ready market for the assets. Now, in the new tighter credit environment, that market is largely dried up, while supply is going up and will go through the roof in the months to come.

So government is having to inject more money into the system, which ultimately increases supply while lowering demand for those currencies.

Which means, in a roundabout way, the price of gold relative to those currencies is going to go up. The more money central banks have to pump back into their economies to alleviate liquidity crises, the more upward pressure will develop under the price of gold.

Presently gold is trading around its 16-month high, and looks strong at these levels.

If the Fed cuts interest rates by 25 basis points tomorrow, that will almost certainly send gold higher, as it will send a strong signal to foreign holders of U.S. currency that their rate of return on U.S. dollar holdings will fall victim to the Fed’s monetary policy.

That could see those U.S. dollars move increasingly into gold as huge government investors run from the greenback.

Northern Rock PLC, the U.K. mortgage lender that was the recipient of an emergency bailout package by the Bank of England, is now effectively in play as a takeover target because of is huge drop in share price. Northern Rock has shed over 35% of its market capitalization since the announcement last week.

Customers who were lined up outside the Newcastle branch burst into laughter when an employee came out to inquire if anyone was there to deposit funds as opposed to withdrawing them.

That grass roots panic could grip some U.S. banks, and if it does, the price of gold will go through the roof in short order.

The price of gold is already going through the roof, albeit as fast as cold molasses. But this credit problem is much like the onset of a bad case of flesh-eating bacteria. One minute the patient seems healthy, and then within months there’s no patient left.

A little drastic, perhaps, but it would be foolish to underestimate the scale of what is happening right now.

Gold is increasingly being snapped up by Asian and Middle Eastern customers.

Gold sales in Dubai could increase 40 per cent in September compared to last year’s figures, said the managing director of the Dubai Gold and Jewellery Group in a Qatar newspaper.

The Peninsula reported that Tawhid Abdullah, who is also the chairman of international jewelry retailer Damas, said that he expects that gold sales will increase in the fourth quarter of 2007 as customers make more purchases during the Dubai Shopping Festival and the Islamic month of Ramadan.

“The market is not affected by the current prices of gold and we have a better economy in Dubai and strong consumer confidence,” he said.

Gold sales in August were up 26 per cent compared to the same month in 2006.

All Signs Point to Buy Gold!!

2007-10-06T11:03:00.000-07:00

Source:Goldworld

Mortgage Meltdown and Falling US Dollar Add Strong Bullish Sentiment to Buy Gold

DENVER, CO--Continued turmoil in the mortgage finance system led to an 8.3% drop in the sales of new single-family homes for the month of August. Meanwhile, builders in the US began work on the fewest homes in twelve years and new building permits dropped 5.9% to their lowest levels since 1995.

Yuck!

Robert Toll, chairman and CEO of Toll Brothers Inc., summed up the current housing market and credit crunch nicely two weeks ago while speaking at the Credit Suisse Homebuilder Conference ......

Deep doodoo indeed

Home builders are now launching new promotional price reductions as well as other incentives to attract homebuyers and move standing inventory off their books.

It's an act of desperation that I doubt will have much positive effect for them.

Potential buyers are being constantly inundated with negative media commentary on the housing market, which is further exacerbating residential housing woes.

There are about twice the numbers of homes on the market for sale compared to a year ago. Buyers have more choices, leading to higher competition among sellers and lower prices.

Furthermore, lending standards across the country are tightening. Folks who want to put no money down on a home are being subjected to more scrutiny when they apply for a mortgage loan. As a result, they are being turned down more often than they were last year.

The consequence is that houses are sitting longer on the market, and once again no one benefits. Homeowners get anxious when waiting to sell their houses and often react by lowering prices and accepting lower offers.

In an effort to help the housing market the Fed stepped in two weeks ago and cut interest rates by a half-percentage point, the first rate cut in the past four years.

It was the old band-aid on the broken leg.

And that's because for the sub-prime mortgage borrowers who are already on the brink of foreclosure, the Fed cut is of little consequence. At this point in the game, the Fed simply cannot help them. The Fed cannot help them!

Moreover, the Fed cannot fix the overall broken house market. It can only work to delay the inevitable.

The world's financial policy technicians will be hard pressed to solve the housing issue. And for now we can't get around the problem. We have to just go through it.

The piper must be paid.

Meanwhile the USD continues to erode in value.

The dollar extended its recorded-setting lows against the euro this morning. The once mighty greenback fell to $1.43 per euro, its lowest level since the 13-nation currency's debut in 1999.

The USD Index, a basket of six weighted world currencies, has also been steadily trending lower. At last look, the USD Index was at 77.86.

Further dollar weakness is probably still in the cards. And an unpleasant thought lingers in the back of everyone's minds: Recession.

Let's face it . . . Americans are spending junkies. We've borrowed trillions of dollars to remodel our homes, take vacations to Tahiti, and buy 60" plasma HDTVs and giant gas-guzzling SUVs.

There are consequences to this lifestyle. And we'll reap what we've sown.

We're living financial history here, ladies and gentlemen. And the best way to hedge yourself against personal fiscal catastrophe is by doing what I've been urging--practically begging--people to do for the past ten years: BUYING GOLD!

With the USD on the back foot and the economy on the verge of recession, precious metals will see continued support.

Gold has recently breached the $750/oz. level as the reality of economic disaster is finally beginning to sink in.

The yellow metal is now at a 28-year high after rising some 10% last month. And the fundamentals for gold have never looked stronger.

Besides the weakness in the USD and the credit crisis, September and October are typically a period when jewelers increase their holdings. Gold ETFs have also been buying aggressively in recent months and central bank selling has cooled off.

Please, do yourself and your family a favor: Hedge the coming financial economic crisis with gold.

Commodities as an Asset Class!!

2007-10-05T11:07:00.000-07:00

In a low-return world, high-yielding commodities have become the siren song of the asset-liability mismatch. Well supported by seemingly powerful fundamentals on both the demand (i.e., globalization) and the supply sides (i.e., capacity shortages) of the macro equation, investors have stampeded into commodity-related assets in recent years. Once a pure play as a physical asset, commodities have now increasingly taken on the trappings of financial assets. That leaves them just as prone to excesses as stocks, bonds, and currencies. This is one of those times.

Previously, It was argued that Chinese and US demand were both likely to surprise on the downside - outcomes that would challenge the optimistic fundamentals still embedded in commodity markets. It’s also hinted that the asset play could well reinforce this development - largely because commodities have now come of age as a legitimate asset class in world financial markets. The same is true of foreign exchange reserve managers and corporate treasury departments of multinational corporations. A former commodity executive now runs one major Wall Street firm and another has turned over management of its global bond division to the architect of its thriving commodity business.

Like all such trends, the expansion of the commodity culture is rooted in performance. It's not just the physical commodities themselves - most commodity-related assets in cash and futures markets have also delivered outstanding relative returns. For several years, the so-called commodity currencies of Australia and Canada have been on a tear, and big commodity producers like Russia and Brazil have led the recent charge in high-flying emerging markets. Within the global equity universe, the materials sector has been the number-one ranked performer over the past year - up 14%, or double the 7% returns of second-ranked financials. And, of course, there is the growing profusion of commodity-related ETFs. Meanwhile, Commodity Trading Advisors (CTAs) now collectively manage over $70 billion in assets - more than three times the total three years ago - and the IMF reports inflows of approximately $35 billion into commodity futures last year alone.

Significantly, the consultants are now urging institutional investors to implement a major increase in their asset allocation weightings to commodities. A recent Ibbotson Associates study recommends that commodity weightings in a multi-asset balanced portfolio could be increased, under conservative return and risk-appetite assumptions, to a high of nearly 30%. That would be more than three times current weightings and greater than seven times the estimated $2 trillion value of current annual commodity production (see T.M. Idzorek, "Strategic Asset Allocation and Commodities," March 2006, available on www.ibottson.com).

The Ibbotson analysis endorses commodities for their consistent outperformance and negative correlations with other major asset classes - going so far as to praise commodities for actually providing the protection of "portfolio insurance." It concludes by stressing "...there is little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period." Laboring under the constant pressure of the asset-liability mismatch, yield-starved investors can hardly afford to ignore this enthusiastic advice. As a result, with multi-asset portfolios likely to have ever-greater representation from commodities, the financial-market dimensions of the commodity trade should become increasingly important.

This transformation from a physical to a financial asset alters the character of commodity investments. Among other things, it subjects the asset to the same cycles of fear and greed that have long been a part of financial market history. From tulips to dot-com and now probably US residential property as well, the boom all too often begets the bust. Yale Professor Robert Shiller puts it best, arguing that asset bubbles arise when perfectly plausible fundamental stories are exaggerated by powerful "amplification mechanisms”. That appears to have been the case in commodities. In this instance, the amplification is largely an outgrowth of the China mania that is now sweeping the world - the belief that hyper-growth in commodity-intensive China is here to stay. That's why I blew the whistle on this one: Not only do we believe that the Chinese authorities will make good on their efforts to cool off an over-heated economy, but we also suspect they will succeed in engineering a well-publicized shift toward more efficient usage of energy and other commodities.

The potential for post-housing bubble adjustments of the American consumer could well be the icing on this cake - not only lowering US commodity demand through reductions in residential construction activity but also by reducing end-market demand in China's biggest export market. The recent data flow hints that such adjustments are now just getting under way - underscored by reports of a meaningful slowing of Chinese investment and industrial output growth in August and a continuing stream of bad news from the US housing market.

Meanwhile, the performance of commodity-based financial assets is starting to fray around the edges. That's true of energy funds as well as those asset pools with more balanced portfolios of energy, metals, and other industrial materials. While most of these investment vehicles have outstanding 3- and 5-year performance records, the one-year return comparisons are now solidly in negative territory for many of the biggest commodity funds. And this is occurring at the same time that the MSCI All-Country World index has delivered a 14% return for global equities over the past year. Underperformance for a few months is hardly cause for concern, but for both relative- and absolute-return investors, negative comparisons over a 12-month period are raising more than the proverbial eyebrow. As usual, the "hot money" has been the first to head for the exits, but more patient investors may not be too far behind. Shiller-like amplification mechanisms could well compound the problem. Just as they led to near parabolic increases of many commodity prices in March and April, there could be cumulative selling pressure on the downside - taking commodity prices down much more sharply than fundamentals might otherwise suggest.

For the money, there is far too much talk about the globalization-led commodity super-cycle. It gives the false impression of a one-way market, where every dip is buying opportunity. Yet commodities as a financial asset are as bubble-prone as any other investment. As is always the case in every bubble we have lived through, denial is deepest when asset values go to excess. That's very much the case today. After three years of extraordinary out performance, denial over the possibility of a sustained downside adjustment in commodity prices is very much in evidence - underscoring the time-honored sociology of an asset class that has gone to excess. Meanwhile, China and US-housing-related fundamentals are going the other way - setting up increasingly tender commodity markets for unpleasant downside surprises on the demand side of the global economy. The herding instincts of institutional investors could well magnify the price declines - when, and if, they emerge. All this suggests there is still plenty of life left in the time-honored commodity cycle.

Crude best clue to buy or sell gold!!

2007-10-05T11:03:00.000-07:00

If you want to follow trends in gold prices, better study the crude oil market. Both gold and crude prices have been going in tandem in the last eight months. Going by the price movement of both commodities, it is clear that when crude price surges, so does the gold price. And vice versa. Based on this trend, bullion traders and investors have started tracking crude prices before buying and selling gold in a large quantity.

"As there seems to be a co-relation between these two commodities, we have started taking crude price into account before placing buy or sell order for gold," Monal Thakkar of Amraplai Industries, a leading bullion company, said. Crude prices, of course, have also started influencing the Indian bourses, albeit in an inverse manner. Whenever crude goes up, it adversely affects the market sentiments.

"The inverse relationship between crude prices and the stock market has been established in the past few months. But one reason for gold price to move in tandem with crude price could be inflation. Upward movement of crude price leads inflationary pressure in the economy and investment in gold is traditionally considered as hedge against inflation," C Jayaram, executive director, Kotak Mahindra Bank, said. Another reason can be the US dollar movement. Increasing crude price makes the US dollar weaker and a weakening dollar leads to higher exposure in gold.

So crude prices make an impact on gold via the dollar price movement. It may be pointed out that there was no direct correlation between crude and gold prices in the previous years. "The fact that this year gold price is moving in tandem with crude is prompting investors to take long positions in gold, on the assumption that crude prices are bound to rise further," Anupam Kaushik, vice-president, Anagram Comtrade, said.

Is the commodity run over??????

2007-10-05T11:00:00.000-07:00

The drop in oil, gold and other raw materials since May is signaling an end to the five-year bull market in commodities as global growth slows and demand falls.

``The mega-run for commodities has run its course,'' says Stephen Roach, the New York-based chief global economist at Morgan Stanley, the world's biggest securities firm. Roach in May said the surge in oil and metals was a bubble about to pop.

Since then, the Reuters/Jefferies CRB Futures Price Index has fallen 12 percent from a record, more than enough to qualify as the first so-called correction since the rally began in 2001. The Goldman Sachs Commodity Index, after gaining for four years, has lost investors 5.1 percent in 2006. Gold and sugar already are in a bear market, defined as a price drop of 20 percent.

Commodities are plunging because of reduced growth in some of the world's largest economies. The U.S. Federal Reserve's report on economic conditions in each of its 12 districts last week indicated consumer spending rose ``slowly.''

Expansion in China, where growth of 9 percent in the past four years caused raw-material orders to surge, may be curtailed as the central bank raises interest rates and curbs lending. Some strategists remain bullish. James Gutman, senior commodities economist in London at Goldman Sachs Group Inc., the world's second-largest securities firm by market value, says the commodities losses are nothing more than ``cyclical fluctuations.

``We're certainly not at the end of the long-term bull market,'' says Gutman. ``If there are any near-term corrections, I'd view them as a buying opportunity.''

Prices Tumble
Sugar on the New York Board of Trade is down 40 percent from its February peak. Gold dropped below $600 an ounce today, its lowest in 10 weeks. Soybeans are 15 percent below their July high, and crude has lost 15 percent from its record level.

Frederic Lasserre, director of commodities research at Societe Generale SA in Paris, said a 50 percent plunge in metals prices is ``likely.'' Investor Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, agreed that a slowdown in the world economy means lower prices are ahead.

``Some industrial commodities may have peaked out for good,'' said Faber, who told investors to bail out of U.S. stocks a week before the 1987 so-called Black Monday crash. ``Grains and precious metals may continue to rise as they aren't tied to the economic cycle,'' he said in an e-mail.

Declines Accelerate
The drop in commodities gained momentum Sept. 8 with oil, gasoline, gold and copper falling. The pace of the declines may slow over the next 12 months.

That's because the global economy will expand about 5 percent in 2006, and growth next year will be ``robust,'' Masood Ahmed, a spokesman for the International Monetary Fund in Washington, said on Sept. 7.

IMF Managing Director Rodrigo de Rato said Europe and Japan will help power the economy, while the U.S. slows because of a cooling housing market and higher interest rates.

``You can certainly see the paws, but not a whole bear'' in commodities markets, said Joachim Klement, asset-allocation strategist at Zurich-based UBS AG's wealth management unit. ``We are not in a bear market yet. The long-term uptrend in commodities is still intact.''

$40 Oil Forecast
Crude oil should be at $50 a barrel now, rather than at $66, because investments by fund managers have pushed prices too high, according to Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York. Standard Chartered economist Steve Brice in Dubai last week wrote that $40 crude oil is possible.

Commodities prices may slide for another nine months, said Tony Dolphin, who helps manage $125 billion at Henderson Global Investors Ltd. in London.

``A bubble scenario in commodities is still there but I expect a more controlled decline in prices,'' he said. ``The global economy hasn't built in any grave imbalances, such as the run-up in inflation in the late 1980s or the overinvestment in technology during the late 1990s, so I think the downturn will be limited.''

Optimistic Investors
Michael Lewis, head of commodity research at Deutsche Bank AG in London, points to falling world stock markets as a sign that the commodity bull market has further to go.

``If equities were posting double-digit growth, then money would fly out of commodities,'' Lewis said. ``That hasn't been the case. Commodities can still compete for capital. There's still room for prices to run.''

Morgan Stanley Capital International Inc.'s World Index, a measure for global stocks, has fallen 4 percent from its 2006 peak reached on May 9. Investments in the Goldman Sachs Commodity Index and the Dow Jones AIG Commodity Index may rise 50 percent to $150 billion by 2007 as pension funds and other money managers diversify from stocks and bonds, Sanford C. Bernstein said in an Aug. 21 report.

Some hedge fund managers say they can't take any more losses.
Ospraie Management LLC, run by Dwight Anderson, liquidated the $250 million Ospraie Point Fund that fell 29 percent in the first five months of the year, in part because of wrong-way bets against commodity prices.

MotherRock LP, the hedge fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, told investors last month he planned to shut down because of a ``terrible performance'' as natural gas prices sank. Collins didn't return messages left at his office and on his mobile telephone for comment.

Correlation between Gold and U.S. Interest Rates!!

2007-10-05T10:56:00.000-07:00

Every time the Fed announces a decision on the US interest rates, gold prices also react. If interest rates are increased, gold prices go down, and vice-versa, indicating a negative correlation. The explanation offered is that when interest rates rise, the higher returns attract foreign capital and demand for dollars. The higher demand for dollars raises the US dollar-exchange rate. This increased return on the dollar makes gold less attractive and, hence, the gold price falls.

This theory is what is put forward by television channels and economics courses around the world. For lack of a better phrase, one may refer to the above as the "Maggi Theory of Gold", that is, the theory is valid for the first two minutes of trading after announcement of an interest rate decision. Beyond that initial speculative sentiment, the historical evidence has been quite contrary to what is suggested by the above theory.

The Evidence
1971 was when the US went off the gold standard and thus, that would be a good starting point for this analysis. In January 1971, gold prices averaged $37/ounce and interest rates were 6.24 per cent. For the next 12 years, both increased gradually. Gold averaged $673 by September 1980, while interest rates peaked a year later, at 15.32 per cent.

For the next two decades, there was a bear market in the precious metal, in conjunction with declining interest rates. Gold prices bottomed by April 2001, at $260, and interest rates bottomed out by June 2003, at 3.33 per cent. From the bottom, both have been increasing steadily and, by June 2006, gold averaged $600, and the interest rate was 5.11 per cent.

Indeed, barring very short-term time-frames, the correlation is actually a strongly positive one - higher interest rates mean higher gold prices. But why is this so?

"Real" Theory of Gold
For one, gold is not an interest-bearing instrument. So "other things being equal", any interest-bearing instrument should be preferable. It does not matter whether the interest rate is 0.5 per cent or 50 per cent - one would be worse off holding gold. So it is not the interest rate that influences gold prices, but the "other things" that is assumed to be equal.

So what are the "other things"? Let us get to the basics of investing to answer that. According to Benjamin Graham, "an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". Most people would agree that it should at least be equal to the risk-free interest rate and a risk premium for holding a risky asset class.

But what happens when real rates of interest are negative? Then, an investment operation, even when it fits in with the above definition, would fail to maintain the purchasing power. So a more appropriate definition would be as follows: "An investment operation is one which, upon thorough analysis, promises safety of principal and a return that at least ensures maintenance of purchasing power over the period invested". Consequently, when expectations of inflation are high, investors prefer gold as a mechanism for protecting their purchasing power. Thus, when confidence in a currency is high (low inflation), then gold prices would be low and, for the same reason, interest rates also would be low. The best explanation for the gold standard was, ironically, given by the former US Fed chief, Alan Greenspan, in his speech "Gold and Economic Freedom" in 1966:

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which the banks accept in place of tangible assets and treat as if they were an actual deposit, that is, as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."

Of course, the Maestro managed to unlearn this virtue by the time he reached the Fed, where he began the biggest money printing exercise ever witnessed. He did exactly what he had said would happen in the absence of a gold standard.

The effects of that can be observed in the Graph that shows how chocolate prices moved before and after the era of easy money. Chocolate is just an example, but it's true of almost every other consumer good. The Fed-doctored CPI or core rate will never tell you the true story.

Gold as leading indicator
While the positive correlation between gold and interest rates is obvious, the peaks and troughs do not exactly coincide. If we plot gold vs 18-month future interest rates (that is, gold of January 1970, matched with the interest rate of July 1971), then the lines coincide almost exactly as shown in the Graph.

What this means is that the yellow metal has been a very good indicator of interest rates. Given the fact that gold has been going up sharply in the recent past, one can expect the interest rates to follow soon. In an earlier article titled "The Inflation Game" (Business Line, July 21, 2006), this writer had explained why interest rates are set to increase. The current surge in gold just goes to confirm that.

The Golden Future
An interesting exercise would be to estimate how high the precious metal would go up in the next decade of rising interest rates. In the previous interest rate cycle of 1970 to 1983, prices went from $35 to about $675 (it touched $850 for one minute) - an increase of nearly 20 times. This time around, we started from $260, so will we exceed $5,000?

One could argue that the gold price, as fixed by the US Government in 1970 at $35, was artificially low and, hence, the move appears exaggerated.

On the other hand, one could make a case that in every economic aspect - fiscal deficit, consumer debt, trade deficit, debt-to-GDP, etc - the US is much worse than it was during the 1970s and so gold could be headed for an even greater move.

A more fundamental reasoning would be that the 35-year experiment with the loose-monetary system has to end "eventually".

Subsequently, when we go back to Bretton Woods, gold would have to be priced at $30,000 to account for the dollars in circulation today. Thus, using a gold standard to define the intrinsic value of the metal, $5000 would indeed be cheap.

Whatever happened to Gold?

2007-10-05T10:51:00.000-07:00

Crude Oil is by far, today's most essential and indispensable commodity. The world would literally come to a halt if trucks, ships and airplanes powered by oil, could not deliver essential goods.

Gold on the other hand has been, since early times, a trusted measure of currency and a safe haven for traditional investors. We are by no means "gold bugs". We are reporting facts as would relate to any other investment. For our purposes, this article will look at how these markets move relative to one another.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

What is the Gold/Oil Ratio: The Gold/Oil ratio measures the number of barrels of oil that equate to one ounce of gold. It is calculated by dividing the price of Gold by the price of a barrel of Crude. According to researcher Adam Hamilton of the Zeal Intelligence newsletter, the Gold/Oil ratio stood at an average of 15.3:1 for the 40 year period from 1965 to 2005. The range was as high as 33 with a historical low of 6.6. Looking at the December contracts for Gold and Crude Oil as of the close on 10/9/06 that ratio stood at 9.48 ($582.80/$61.49). Again this simply means that the price of Gold is 9.48 times the price of Oil.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

This suggests that prices will eventually realign to a "fair mean". In this instance Gold should move higher unless, of course gigantic new deposits of oil are discovered and find their way to the marketplace rapidly - which is quite unlikely - causing the price of Crude Oil to drop.

In the late 1970s, Gold lagged oil eventually rallying up with to hit its all time highs of $850. Today, the scenario appears poised to repeat itself, however keep in mind that past performance is not indicative of future results. Even when Dec. Crude oil moved up to $76.90 on May 12, 2006, Dec. Gold went to $753.00 bringing the ratio to approximately 9.79:1. Based on the historical average of 15:1, Gold still appears undervalued relative to crude oil. Another factor affecting the price of Gold is the fact that the US Dollar has been trending higher as of late and the correlation between these two markets is negative, meaning that they have a tendency to go in opposite directions.

What will it take for Gold to get back to its historical ratio of 15:1?
Let's examine world events that could contribute to higher Gold prices:

OPEC announced a 1 million barrels/day cut with the intention of maintaining Crude prices above $55.00/barrel; Demand for Crude oil prices is still growing due to expanding economies in Asia, notably China and India; Alternative fuels, though readily available, are years away from mass distribution; Energy efficiency has improved however demand continues to grow;
N. Korea successfully accomplished a nuclear test and could potentially become a threat to peace in the region; Slowing real estate markets in the US along with growing consumer debt (up $4.99 billion in August according to the Federal Reserve) may cause the consumer-driven US economy to take a hit;
China's central bank announced its intention to double its Gold reserves after already doubling them to 600 tons. If China were to increase its reserves to only 5% of its foreign exchange holdings, it would have to purchase an additional 1900 tons of Gold making it the 5th largest holder behind the U.S., Germany, the International Monetary Fund and France;
The Financial Times reported that Germany's Bundesbank will halt its sale of gold reserves for the third year and other central banks worldwide have followed suit while others have beefed-up purchases;
FT also reports that Italy and Ireland have not sold any gold in the past two years;
Worldwide concerns over the US Dollar has many central banks alarmed over the currency risk associated with holding the Greenback;
Russia, Argentina, South Africa, the UAE and several others are adding Gold to their portfolio as a way to offset their risk exposure in the US Dollar;
The growing national debt in the US (the largest in the history of the world) is sending a message of unease to world economies who are fully aware that their economical welfare is highly dependent on a healthy US economy;

What To Do?
Looking at the chart above, we can see that Gold is clearly not in a bullish stance. Each time Gold has tried to go back up, it's made lower highs followed by lower lows; far from a bullish sign. We can see that since it made its high in May 2006, Gold has retraced back nearly 25%. Short term resistance is at $600 with longer-term is at $630. Support is at $555 and if broken could signal an extended down-trend. Although I am long term bullish on Gold for all the reasons listed above and more,

I believe that we'll see Gold trading in a range well into November at which time, growing demand should push prices back to the highs made in May of this year. In my opinion for the time being, it would be wise to be patient, look for an entry point once prices have established a clear uptrend and proceed cautiously when that time comes. This market carries a lot of risk and daily swings can be gut-wrenching.

Gold:On the move again By Chad Butler

2007-10-05T10:48:00.000-07:00

After a brief hiatus, Gold is returning to my radar screen. With downside momentum in check and a successful hold of previous support, Gold may make that push to make a strong finish to this year. How can a trader take advantage of this market?

I find that a longer term focus using a trend following methodology works best for me. Ultimately, I use the 9 day simple moving average to tell me what the short term money pressure is on the market, and I look at the 50 day moving average to tell me what the long term money pressure is. If the 9MA is above the 50MA, the market is in a bullish stance, and I would look for buy entries. If the 9MA is below the 50MA, the market is bearish and I would be looking for an opportunity to sell.

Currently in Gold, the 9MA is about to move above the 50MA, indicating that we should be looking for buy entries. This is reinforced by the MACD. I use a 9/50 compression on the MACD to complement my use of the 9MA and the 50MA. In late October, we saw a MACD cross, indicating a shift of momentum to the upside.

The conservative trader should wait for a day in which the 9MA settles above the 50MA prior to entering the market. A more aggressive trader could be looking for entries now. But what are the possible trades?

When using the trend following methods that I use, I caution not to use the technical indicators (the moving averages or the MACD) as both a screening tool AND an entry tool. Rather, I prefer to use price action to determine specific entries and exits. The most conservative entry is to buy a breakout of resistance. In the case of Gold, round numbers are key psychological barriers and therefore make good points to watch for breakouts - 620, 630, 640 will be key. Also, a breakout above previous resistance is a good entry. The market is breaking out today, the next preciously tested resistance level would be the 648.50 level. I find 620 to be significant as well as it has been a previous area of support.

For more precision, one could wait for a setup using the 20 day exponential moving average. This trade setup occurs when the market pulls back and settles below the 20 day exponential moving average, then makes an attempt to regain the high of the day that settled below that level. The textbook trade is to buy the open of the following day. However, traders employing this technique are cautioned to wait for confirmation that we are in an uptrending market ( i.e. the 9MA has crossed the 50MA).

Alternatively, more conservative traders could employ option spreads in Gold. An option spread, such as a bull call spread, gives a trader the opportunity to participate in the market with a limited risk position (the risk on a bull call spread is limited to the cost of the position). The advantage to using a spread like this, as opposed to buying a call option outright, is that for similar cost, a trader can often get a position that is closer to the actual market price. The tradeoff in this trade is that the upside potential is capped at a maximum amount (the difference between the strikes).

Here is an example. A trader would purchase a 640 call February 2007 gold while simultaneously selling the 680 call. The 640 call currently has a theoretical value of approximately $1800. The 680 has a theoretical value of about $880. To construct a bull call spread, the trader buys the 640 call for $1800 and sells the 680 call for $880. The difference is $920. That is the net cost of the position and the maximum that the trader can lose on the trade.

But how much can he make? If Gold is trading at or above 680 at expiration (85 days from now), the position would be worth the difference between the strike prices. This is $4000. Take away the $920 that the position cost and the maximum net possible gain would be $3080. This is approximately a 1:3 net risk:reward ratio (1:4 gross). When constructing option spreads, I find this to be a reasonable number and I seek out trades that are at least 1:3 risk versus reward.

But what about the outright call positions? Well, for the same money as our spread trader, a trader would have to go to the 675 call in February 2007. The current theoretical value is approximately $966. But for that to be a better trade, Gold would need to be trading above 684.66 at expiration just for us to break even (675 strike + 9.66 paid for the call). To beat the call spread, we would need to be at $715.46. Now, if we were expecting gold to be trading well above that, the outright call would be our preference. But the call spread gives us a good look at the upside while keeping us in a limited risk position.

Certainly, for the trader willing to take the risk, the outright futures are trade to take. You get a 1:1 look at the market, while the market will have to make significant strides for the outright call or the call spread to benefit. But risk has to be considered with that. Traders looking to get long on either a breakout move, or on a 20EMA setup, a stop at key support would be necessary. For me, this is the 565 area. I would want my stop to be somewhere outside of that area, looking at 560. If the market clears and settles above the previously outlined resistance areas, the stop could be trailed behind accordingly.

I have outlined some broad trading examples here to take advantage of a building uptrend in Gold. But there are some caveats. First, if you do not understand the risks of any of these trades (or any trade for that matter), you are advised to do nothing until you fully understand and are comfortable with the risks. Second, these are some broad examples. They are geared to more intermediate to advanced traders that can work them into an already sound trading plan. If you lack a sound plan and the discipline to execute it, you would be wise to discuss a plan with a market professional prior to taking any action.

Metals-Snap Shots!!

2007-09-25T00:00:00.000-07:00

Silver is a lustrous silvery metal extremely malleable and ductile: symbol Ag (Lat. argentum). Known since prehistoric times, silver occurs native in Peru, but the chief ores are sulpides, from which the metal is extracted by smelting with lead. It is the best metallic conductor of both heat and electricity, and its most important compounds are the chloride and bromide which darken on exposure to light, the basis of photographic emulsions. Silver is used for tableware, Jewellery, coinage, electrical contacts and electro-plating, and as a solder it makes good metallic joints at 720ºC. The world’s greatest producer of silver is Mexico (c. 40,000,000 troy oz. p.a.) followed by the U.S.A., Canada, Peru, the Russia, Australia and Japan.

Aluminium is the most abundant metal, valuable for its light weight, having at. no. 13, at. wt. 26·98, and chemical symbol Al. Nearly one-twelfth of the substance of the earth’s crust is composed of aluminium compounds, but aluminium in its pure state was not readily obtained until the middle of the 19 th century, for it oxidizes rapidly, and much energy is needed to separate the metal from chemical combination. Pure aluminium is a soft white metal. It is one of the lightest of metals, its specific gravity being 2·70, and for this reason is widely used in shipbuilding and aircraft. In the pure state it is a weak metal, but when alloyed with other elements such as cooper, silicon, or magnesium, alloys of great strength are obtained. Commercially, aluminium is obtained from bauxite (q.v) and requires large supplies of electric power, as at Kitimat in Western Canada. Aluminium is much used in steel-cored aluminium overhead cables and for canning uranium slugs for reactors. Aluminium is an essential constituent in the Alcomax series of magnetic materials; and as a good conductor of electricity is used in the form of foil in electrical capacitors. In the U.S.A. the original name suggested by Sir Humphry Davy Aluminum (aloo-) is retained.

Cooper is a chemical element, one of the earliest metals used by man. Chemical symbol Cu; at. no. 29; at. wt. 63·54. It is salmon pink, very malleable and ductile, and used principally on account of its toughness, softness, and pliability, high thermal and electrical conductivity, and resistance to corrosion. When alloyed with tin it forms bronze, a relatively hard metal, the discovery of which opened a new age in human pre-history. Until about a century ago, Spain and Cornwall were the chief producers, but these are now of minor importance compared with the U.S.A. (which produces about a quarter of the world’s output). Chile, Canada, Zambia, and the Katanga area of the Congo. Cooper is usually commercially extracted from cooper pyrites. Large deposits containing cooper sulphide occur in the Lake Superior district in North America, and in Spain. Other ores from which cooper is extracted include malachite, crysocolla, and atacamite.

Gold is a heavy, valuable, yellow metallic element, with symbol Au, atomic number 79, and atomic weight 197·0. Gold has long been valued for its durability, malleability, and ductility, and because it may be easily recognized. It is unaffected by temperature changes and is highly resistant to acids. Its main uses are in coin and jewellery. South Africa produces almost 75 per cent (30,500,000 fine oz. p.a.) of the world’s gold and other major producers are the Russia, Canada, U.S.A., and Australia. For manufacture, gold is alloyed with another strengthening metal, fineness being measured by the parts of pure gold in 24 carat.

Nickel is a lustrous white metal discovered by Cronstedt in 1751, the name being an abbrevation of Swedish kopparnickel (false cooper): symbol Ni, as. wt. 58·71, at. no. 28. It has a high melting point, low electrical and themal conductivity, and can be magnetized. Nickel may be readily forged when hot, and is though, malleable, and ductile when cold. Canada provides the most extensive deposits, which are usually extracted with cooper. Smelting precedes separation, after which the Nickel is purified. It is used in coinage; in chemical and foodstuff industries for its resistance to corrosion; in electronics and for electroplating. The most important use, however, is in alloys with iron, steel, cooper, and chromium, incl. Nickel steel for armourplating and burglar-proof safes, Moneal metal, invar, constantan, nichrome permalloy, perminvar, and other magnetic alloys and stainless steels, cupro-nickel, nickel-silver, and others. Finely divided nickel is used as catalyst in the hydrogenation of vegetable oils.

2007-09-19T11:51:00.001-07:00

2007-09-19T11:43:00.000-07:00

Fear not Commodity Investing!!-

2007-09-14T04:02:00.000-07:00

For long, the investment universe for Indians consisted of stocks, jewellery, real-estate and bonds. Now, yet another avenue has opened up — commodity futures, thanks to the lifting of the three-decade ban on it.

Though it is four years since the government issued a notification allowing futures trading, commodities attract but lukewarm interest among retail investors.

A large number of brokerage firms are yet to open divisions for the commodities market. Common misgivings among investors are that ``commodities are risky'' and that ``they are difficult to understand'.

Equities versus commodities
Unlike equities, commodities touch every day life. For instance, sugar. Yet, investors keep away from commodities, unable to understand the market. But commodity markets are easier to understand than one imagines.

For one, there are relatively few factors at play, unlike in the case of the equity market where a wide spectrum of factors — earnings, free cash flows, interest rates and risk premiums — drives prices. Also unlike equities, commodities do not carry operational and management risks.

Though to a certain extent, commodity prices are driven by geopolitics and duty structures, they most often reflect the underlying demand-supply situation. A mismatch between them causes price changes.

The risk tag
Investment in any asset class — commodities, stocks, bonds or treasury bills — carries its own risk element. Commodities, in general, are tagged high-risk. This has been validated using statistical tools based on historical data.

Standard deviation is the common tool used to quantify risk, but it reflects volatility more. The risk element is the possibility of the actual varying, on the negative side, from the expected.

Proxies against inflation
Apart from being an asset class, commodities can also be used as instruments to hedge against inflation. In India, a key measure of inflation is the wholesale price index, which comprises both industrial and consumer goods. Though all the goods on the list are not traded in the commodity futures market, investors can use proxies to hedge against inflation. For instance, crude oil can serve as a proxy for diesel and petrol. It may be tempting for investors to invest in commodity stocks rather than in the commodity itself..

For example, the ONGC stock as a hedge against fuel price rise. But investors would need to consider the operational risk that comes with the ONGC stock. A drop in production or drying up of wells would impact the stock adversely limiting its hedging efficacy. But an investment in the commodity itself would not carry this operational risk.

Yet, proponents of the equity market would argue that an investment in a commodity stock is more rewarding than in the commodity itself. The leverage effect that an entity derives would come to the aid of these investors, they say. So how does a firm derive this effect? Take the case of a hypothetical company, Black Tea, which earns an operating profit of Rs 20 crore on a revenue base of Rs 100 crore.

A 10 per cent increase in unit realisation would push its operating profit up to about Rs 30 crore, that is, a 50 per cent growth (assuming the expenditure remains the same). Using the Enterprise Value/earnings befor interest, depreciation, tax and amortisation (EBIDTA) model, a fair value of the Black Tea stock would be 50 per cent higher.

A similar leverage effect is possible in the commodity market as well. For instance, while a barrel of crude oil trades at about Rs 3,900 on the MCX, investors need to pay only the margin, Rs 195 per barrel, to take exposure in a trading lot of 100 barrels.

A 10 per cent rise in crude oil prices would inflate the gains to Rs 390 or about double the investment. Of course, this can work the other way, just as well.

Element of subjectivity
Another argument that stock market proponents might throw is target prices, or the fair value of an asset for an investor. They would argue that arriving at target prices using fundamental analysis is difficult for commodities.

Though the target price — that help establish if an asset is over- or under-valued — approach to investing is thought to be scientific, there is a significant element of subjectivity attached. For, the various valuation models that generate the fair value are based on such subjective elements as growth rates.

Investors need to also understand that target prices do not guarantee returns. Though forecasting the direction of prices does not quantify the possible returns, it is the key to profiting from an investment.

With fewer factors in play in the commodities market, it is easier to forecast the direction of the prices.

Courtsey:The Hindu

Hedging with Steel Futures!! In LME Perspective

2007-09-14T02:45:00.000-07:00

Lets start with the following scenario:

• Seller – HRC Steel Mill, with 100,000 tons per month to sell
• Buyer – Pipemaker, with capacity to produce 10,000 tons per month
• LME steel futures contracts are monthly contracts, expiring, say, on the 15th of the month before the month of delivery. What this means, for example, is
o All February delivery futures contracts will expire on the 15th of January.
o Any futures contract, issued at any time in the preceding 12 months, for August
delivery will expire on the 15th of July.

First week January

The pipemaker is negotiating an order to supply 5,000 of base grade pipe to a pipeline project in Q4. He will require the tonnage in September, hence demands shipment from his supplier in August.
The mill wants to produce the steel, and over the next few days negotiates with the pipemaker all the details of the specification – various widths & thicknesses, specific coils weights etc. They sign a forwards contract to this effect, committing the mill to deliver the 5,000 tons in August.

January 10th
Now lets look at the LME steel futures pricing table we looked at in our ‘Interpreting Futures Prices’ section, where we suggested, lets say its January 10th, and the LME steel futures screen for base grade HRC on our computer or in the Financial Times states:

Period Cash 3-month 6-month 12-month
Price $300 $310 $280 $255

For the steel mill, it does not know what the price of August delivery HRC will be. It may think it will be more than US$ 280 ton, or maybe it will be less. It’s a gamble, because at the end of the day the mill does not know what the price will be. No-one does. The mill can not determine its cashflows for Q4. It does not know whether it will make a profit or a loss. And an equity provider does not know whether the mill will be able to repay its loan on time, or even at all.

These are the risks associated with volatile pricing. These are the risks that hedging with futures can eliminate. Using LME steel futures, our mill can lock-in the price of US$ 280 ton.

Step 1

To match his price exposure relating to his contract for delivery of 5,000 tons in August, the mill needs to find the price for 50 futures contracts (1 futures contract = 100 tons of base grade HRC) for August delivery. August delivery contracts expire on the 15th of July, so on January 10th the mill goes to his broker and to secure the 6-month futures price of US$ 280 ton

Note, for August delivery the mill would be quoted the 6 month price on all days from 16th December to 15th of January. If the mill went to his broker on 17th January for an August delivery contract, he would be quoted the 5-month price.

Step 2

The mill instructs his broker to sell 50 futures contracts (‘lots’) of 6-month futures @US$ 280 ton. The mill is now ‘short’ 5,000 tons in the futures market for August delivery

July 15th
This is the day the mills August delivery contract expires. Futures market now looks like this

Period Cash 3-month 6-month 12-month
Price $260 $240 $250 $295

The price the market is willing to pay for August delivery contracts – remember, that’s what the mill sold in January: 50 futures contracts of 100 tons for August delivery – is the cash price, US$ 260 ton. Remember too, that the cash price is the price that steel buyers in the physical market are willing to pay for August delivery also. So neither the mill nor the pipemaker is faced with the awkward situation where the steel can be bought more cheaply elsewhere. On July 15th US$ 260 ton is both the physical market and futures market price for August delivery.

Step 3

The action the producer takes is to buy back an equal number of identical futures contracts ie 50 lots of 100 tons for August delivery at the cash price of US$260 ton. This has two important consequences.

First, by selling 50 futures contracts for August delivery in January, the mill was committing itself to deliver 5,000 tons of base grade steel via the exchange in August. However, by buying 50 futures contracts for August delivery on July 15th, the mill has cancelled its obligation to deliver steel via the exchange. 50 contracts sold, less 50 contracts bought, equals zero.

o This is what is known as ‘closing out’. The ‘open’ position – the commitment to deliver 50 lots ie 5,000 tons of steel underlying 50 futures contracts in August – has be ‘closed’ by taking an equal (50 lots) and offsetting (originally sold, now buying back) position, to take delivery of 50 lots ie 5,000 tons of steel underlying 50 futures contracts in August. The two equal and offsetting positions have cancelled each other out. The mill no longer has any obligation to deliver or take delivery steel across the exchange.

• Second, the mill has made a US$ 30 ton profit on his futures contracts – the mill sold 50 lots at US$ 290 ton, and has bought back an identical quantity (50 lots) of identical contracts (August delivery steel futures) at US$ 260 ton. That’s a US$ 30 ton profit

August

But what about the physical steel – the API grade coils wanted by the pipemaker?

Remember, back in January the mill and the pipemaker agreed a forwards contract committing the mill to deliver 5,000 tons of HRC in the specific dimensions etc required. Since January the mill has had 6 months to program his rolling schedule, ensuring the coils are produced at the optimal point for maximum production efficiency.

And Remember last month, in July, August delivery coils were trading at US$ 260 ton. So that’s the base price the pipemaker is going to pay for his August delivery coils, no matter where he gets them from. US$ 260 was both the physical market and futures market price for August delivery.

Step 4
So the mill now makes delivery of the 5,000 tons. The price the pipemaker pays is the August delivery cash price – US$ 260 ton.

The Result

The mill has made a gain of US$30 on his futures transaction.

And the mill has produced and delivered the HRC to the pipemaker under their forwards contract. The pipemaker has paid US$ 260 ton.

The mill’s net income therefore is US$ 260 + $30 = $290, the price at which he hedged this 5,000 ton order back in January.

What if Prices had Risen, rather than Fallen ?

What if, between January 10th and July 15th, the Q1 price rise had continued, and prices on July 15th were actually higher, maybe something like this

Period Cash 3-month 6-month 12-month
Price $340 $340 $350 $315

Well, the mill would take exactly the same set of actions

Step 1 – January 15th
Get a quote from his broker for August delivery futures ie US$ 290 ton.

Step 2 – January 15th
Sell 50 lots of August delivery LME steel futures at US$ 290 ton.

Step 3 – July 15th
Buy 50 lots of August delivery LME steel futures at (the ‘cash’ price of) US$ 340 ton.

• Mill incurs a net loss of US$ 50 ton on the futures transaction.

Step 4 – August
The mill makes delivery of 5000 tons of steel as specified in the forwards contract, and gets paid US$ 340 ton.

The Result

US$ 340 ton from the physical sale, less US$ 50 ton loss on the futures transaction, realizes a net income of US$ 290 ton. Again, the level at which the original hedge was taken out, US$ 290 ton, has been achieved.

Thus, it can be seen, that by using futures, the mill has achieve the August delivery futures prices for his transaction. Even though, back on January 10th the price of US$ 290 was just the culmination of peoples opinions, it turns out that that is the price the mill achieved. It is irrelevent whether the actual August delivery price was higher or lower. The mill eliminated the risk of achieving less than US$ 290 ton, and rather achieved its objective of US$ 290 ton.

But wouldn’t it be good for the mill to have eliminated the downside risk, of achieving less than US$ 290 ton, but was able to participate in (at least some of) the favourable upside of pricing at US 340 ton ?

Yes, it would.

Interpreting Futures Prices!!- Steel

2007-09-14T02:16:00.000-07:00

There are many myths and misunderstandings about futures prices

What do they mean ?
Where they come from ?
And aren't they just gambling really ?

In the section below we get behind the myths and explain just what makes up futures prices, and what futures prices mean:

If you asked 3 executives from the steel industry, "what will be the FOB Antwerp price of base grade HRC from first class West European mills in 6 months time ?", you might get answers of US$ 300, US$ 330, and US$ 285. The average of their opinions would be US$ 305.

Now, you might ask them for prices based on 100 tons, and prices based on 1000 tons and 10,000 tons. The 3 executives are likely to adjust their estimates accordingly. For example, 100 ton lots might be priced slightly higher than 10,000 tons lots.

Now, if you asked them for prices for 7 months hence, the pricing of the preceding period - the 6-month prices just discussed - will have an influence on the executive's opinion on the 7-month price. The executives will be stating their 7 month opinion on the basis of

their own opinion of the 6-month and 7-month price

the opinions the 2 other executives expressed for the 6-moonth price

the average 6-moonth price of US$ 305

Essentially, what a Futures Exchange does is provide a forum for the expressions of such opinions about 'future' prices of the product underlying the futures contract, over a number of delivery periods in the future. Because every contract has exactly the same volume of exactly the same underlying, to be delivered to exactly the same place, its easy not to get caught up in technicalities of 'superior vs inferior' qualities, or 'expensive and inexpensive' shipment ports. All those elements are standardized in futures contracts. Everyone can purely focus on price.

In a futures market, rather than have an average of just three opinions, you've got many hundreds, even hundreds of thousands, of opinions of price expressed every day for every delivery period in the future.

Furthermore, those opinions of given credence because they are expressed through the buying and selling of futures contracts. These futures contracts actually commit the seller or buyer of such contracts to make or take delivery of the underlying. So we're not talking random, uneducated or even educated guesses of what prices may be. We're talking commitments to buy and sell very significant volumes of steel.

Set within the framework of appropriate regulatory and legal environments, futures markets are highly efficient mechanisms to centralize credible opinions about price to transparently discover future prices at which committed and knowledgeable market participants are prepared to buy and sell steel.

Basics of Hedging-Steel!!

2007-09-13T07:25:00.001-07:00

Some pointers:

Your hedge desk should not make a profit. If your hedge desk does make a profit, then it has been speculating.
Not to hedge, is to speculate.

The first statement might surprise you. And the second might, at first reading, surprise you even more. But they are both truisms.

Hedging is the process of using derivative instruments - futures, options and swaps - to manage the risks imposed by volatile price movements. Familiarity with the basic building blocks of the process provides the novice with the tools to address even the most complex of derivatives. This is because they are all built from relatively simple concepts. That is not to say that hedging is simple. In concept it is, but in practice hedging can get quite complex. Yet all hedging is developed from quite straight forward building blocks. By thoroughly…..But by thoroughly understanding the building blocks with which all the complex derivatives hedging strategies are developed one can rapidly acquire the know-how to hedge away unwanted price risk

At Steel Derivatives we take the raw novice and progressively develop their hedging skill set. Rather than presenting our client with a hedging strategy, we help you develop your own strategy, tailored to your business model.

And further, Steel Derivatives acts in an advisory capacity to help you develop and install the appropriate controls and reporting mechanisms to ensure your hedge desk is appropriately managed. Because hedging should not make a profit. The purpose of a hedge desk is to provide guaranteed stable incomes on the contracts it is instructed to hedge; incomes that will not vary, produce neither a loss nor a profit, not matter what the volatility in product pricing. If your hedge desk does make a profit, or indeed a loss, then de facto it has been speculating. So, to prevent your hedge desk gambling with your company's profitability, all firms necessarily need a set internal controls.

The way many financial institutions view hedging is that, if derivatives instruments are available to hedge away unwanted price risk, then, not to hedge away those risks, is to speculate that those risks will remain favourable to your business model. If, when hedging instruments are available, one retains exposure to price risk, capital lenders will tend to view you as a speculator, one who gambles on pricing remaining favourable. De facto your firm is a higher credit risk. That will tend to dictate less

Steel Derivatives mission is knowledge communication: communicating our knowledge on derivative instruments - steel futures, options, and swaps - to the steel industry.

What are Steel Futures?

2007-09-13T07:19:00.000-07:00

In January 2003 Steel Derivatives was retained on a full time basis to drive and co-ordinate the LME's steel futures program.

The majority of the steel industry uses forward contracts. These are contracts where the price is agreed today for steel to be delivered at some later time ie delivery 'forward' of today. All the terms and conditions of the contract - the material specifications, documentation, payments, delivery terms etc - are all tailored to the particular contract. Money changes hands at the time of delivery.

Futures contracts are established on the same principle. A price is agreed today for something to be delivered in the future. But, whilst a forwards contract can be tailored to the specifics of the deal in question, a futures contract is standardized. Same volume, same specification, same documentation, same payments, same delivery terms. The only things in a futures contracts that are non-standardized are:

The price
The delivery period

Otherwise Futures contracts are identical to the forwards contracts that the steel industry uses everyday.

There are two important attributes that standardization brings:

First, if you standardize contracts, they can be exchange traded. This applies to steel, sugar, oil, foreign exchange, government bonds or shares in a company. Provided the contracts are standardized, they can be exchange traded.
Second, and closely linked to the principle of exchange trading, is the practice of closing out. Essentially if you sell something in an exchange, then buy the same thing back, you cancel out any obligations incurred when selling. Similarly, if you buy something, then sell the exact same thing back to the market, you cancel out any obligations incurred when buying.

The purpose of Steel Futures is to help manage price risks. They are a tool in your risk management tool box.

Futures Vs Forwards (Steel)

2007-09-13T07:11:00.000-07:00

What's the difference between forwards and futures ?

Forward prices are prices agreed today for delivery in the future. The contract which confirms this transaction, and thereby the forward price, is a forwards contract.
What much of the steel industry deals in now are forwards. You contract today, and commit to prices today, for steel to be delivered in the future ie a period forward of today.
So what the steel industry has now are monthly forwards contracts. That it prices (and all technical details) agreed today for delivery within a particular month forward of today. Might be 1 month forward, or 3 months forward, or for international shipments 5 or even 6 months forward.

Futures are exactly the same in that capacity. You contract today, and commit to prices today, for steel to be delivered in the future.

The only material difference is that futures contracts are standardised. Every contract is the same. Same underlying, same delivery points, same size, same payment terms etc.

Whereas steel's existing forwards contracts allow individual firms to tailor the contracts to fit with their exact needs, futures contracts do not allow such flexibilities. Futures contracts are merely standardised forwards contracts.

Forwards vs Futures Prices

The forwards price - the price contracted to in your forward contract - is usually unique to that deal. So on any day you'll get a range of forwards prices for the same steel, as determined by differences in payment terms, or delivery terms, or packing, or additional testing. You'll even have different prices for the exact same volume of the exact same steel for the exact same delivery, same payment terms etc.

Not with futures. Because futures contracts are all standardised, and not subject to the tailoring of steel's traditional forwards contracts, at any moment in time there is only one price for each delivery period.

Lets just think about the price at which the steel industry's regular forwards contracts are concluded. The price in a forwards contract is the equilibrium price between what the steel mill thinks its steel is worth - the asking price - and what the buyer thinks its worth - the bid price. You negotiate to arrive at the contract price.

In a futures market, instead of

One seller and one buyer concluding one contract at one unique price, there are
Lots of sellers and lots of buyers concluding lots of contracts.

The futures price is the equilibrium price determined by supply and demand of all those contracts.

Price Credibility

So which price is a better reflection of the market ? Which price is more credible ?

The unique, tailored forwards contract price negotiated between a single seller and single buyer, maybe with unique product, payment terms, and other tailored attributes. And because there are many such contracts, there has to be some interpretation / value judgement to define a 'forward price', otherwise the forward price can only ever be a range.

The futures market price, which is the equilibrium level of many thousands of buy-sell contracts, all standardised, and for which there can only every be one price at any moment in time ?

That's why prices in futures market are trusted. They are reflections of many thousands of transactions - at any one time the futures price is always the equilibrium price of many buyers and sellers. They are credible prices because informed buyers and sellers - you, the steel industry, and other interested parties - will be trading contracts, with firm commitments to make or take delivery of steel.

Steel futures prices are not guesswork or hunches or bets. They are the direct result of informed buyers and sellers quoting, bidding, and trading contracts, with firm commitments to make or take delivery of steel. At any one time the futures price for a particular month is the equilibrium price of that quote / bid / trade activity. That's why they a credible. That's why they are trusted.

Steel Derivatives - History

2007-09-13T06:51:00.001-07:00

The Steel Derivatives concept began life as an off-shoot of 'Stemcor Projects & Contracts' (SPC), a division of the Stemcor Group, the world's largest independent steel trading organization. SPC's mission was to supply competitively-priced steels to the world's oil, gas, and power generation companies for their steel-intensive projects such as pipelines, tank storage farms, power stations, petrochemical plants, and off-shore platforms. These projects demanded fixed price steel supply contracts for periods of 6-24 months. With the involvement of financial institutions and its own in house steel procurement expertise, SPC structured novel deals that provided its clients with fixed priced steel, whilst at the same time provided its steel suppliers with prestigious projects at market competitive returns.

As steel price volatilities increased in the latter 1990s, the value at risk of SPCs traditional structured solutions was threatening the sustainability of its activities. Yet in depth exposure to the oil, gas, and energy business models gave SPCs founder and Managing Director, John Short, a critical insight into oil, gas, and energy derivatives - exchange traded futures, and 'over the counter' (OTC) options and swaps instruments. If steel could develop such instruments - lock-in its cash flows, hedge away the negative impacts of price uncertainty whilst retaining the opportunity to participate in favourable movements in price - then price steel's volatility could be managed.

In 2000 Short left the Stemcor Group to pursue the vision of exchange traded steel futures. An informal consulting company was born with a focus on structured finance and risk management techniques in, and steel procurement for, steel-intensive projects in the oil, gas, and general construction industries. Having refined his structured trade and commodity finance skills at a City investment bank, Short went to Oxford University where he led team of finance MBAs on two distinction-graded theses on Steel Futures. The collective knowledge from the MBA team and Oxford faculty was then forged with that of the original consultancy. In 2002 the consultancy was awarded projects examining various aspects of steel futures, options and swaps in Europe, Middle East, SE Asia and Far East.

The culmination of this work led to Short's paper submitted to the Steel Futures I seminar in London (December 2002) declaring that technical design of steel futures contracts was essentially complete. To a large extent, all that remained was 'buy-in' - the desire of direct and indirect participants of the global steel industry to understand and grasp the opportunity to use steel futures in their day to day business.

In January 2003, after further work in Asia, the consultancy was retained exclusively by the LME for their Steel Futures Project. Along with Laplace Conseil, who provided the LME with an initial study, Steel Derivatives is proud to be associated with the LME, whose expertise in running a futures exchange and hosting metals contracts has provided the platform to bring these steel contracts to market. Steel Derivatives remains closely involved with the LME, driving the process forward and heading various 'steel working parties' charged with refining various contract elements in consultation with industry. Meantime our work on OTC products embraces a much wider community of financial instruments and instrument providers, from basic swaps through to complex option products. Furthermore we continue to offer the advisory services on which the company was founded - structured finance, steel procurement, and risk management in relation to steel intensive projects.

Increase Investor Confidence-FMC

2007-09-05T22:01:00.000-07:00

The commodity futures market is preparing itself for the next phase of growth, which will see greater participation of hedgers, corporate entities, exporters, processors and producers, said BC Khatua, chairman, Forward Markets Commission (FMC). In order to ensure this, he said there was need for more stringent and responsive regulation that would increase the confidence of market participants, maintain financial and market integrity, and discourage malpractices.

Mr Khatua was addressing a meeting of the members of the various exchanges belonging to the west zone-MCX, NCDEX and Ahmedabad-based NMCE-in Mumbai on August 31. The FMC has been holding meetings with the members of commodity exchanges on a regular basis to discuss various market related issues and to understand the impact of regulatory measures. In the last financial year, four such meetings were held, one in each of the four zones.

In his address, Mr Khatua underlined the recent regulatory and developmental measures taken by the FMC While outlining the future plans of the FMC, he said that the proposed amendments to the Forward Contracts and Regulation Act, 1952, would strengthen the hands of the FMC. He emphasised that because of the exponential growth and advent of sophisticated technology, the task of regulation had become very
challenging. He also pointed out the need for strengthening the corporate governance structure of the intermediaries to generate market confidence. The exchanges and their members should not only strengthen their capital base but also put in place a comprehensive and transparent governance structure.

During the technical sessions held on the occasion, several issues, such as changes in contract specifications, issues in delivery and penalty for failure in delivery, position limits and linking of the same to capital adequacy, capital adequacy of members, differential margining, discussion forum for developments in trade, etc., were taken up. The FMC and the National Exchanges responded to general issues raised by the participants and agreed to look into specific suggestions.

Friday's meeting was the first meet in a series of four meetings proposed to be convened by the FMC in the current financial year for discussing various trade and market related issues.

Derivatives Hedging::Corporate Uses!!

2007-09-04T23:12:00.000-07:00

If you are considering a stock investment and you read that the company uses derivatives to hedge some risk, should you be concerned or reassured? Warren Buffett's stand is famous: he has attacked all derivatives, saying he and his company "view them as time bombs, both for the parties that deal in them and the economic system" (2003 Berkshire Hathaway Annual Report).
On the other hand, the trading volume of derivatives has escalated rapidly, and non-financial companies continue to purchase and trade them in ever-greater numbers. Consider the Chicago Mercantile Exchange, which is the largest exchange for futures contracts in the United States. As of November 2004, the average daily volume of futures contracts reached 3.2 million, up a stunning 40% from the previous year. In the same month, foreign-exchange futures set a new record for single-day volume, reaching more than half-a-million contracts, with a notional value of over $72 billion.

To help you evaluate a company's use of derivatives for hedging risk, we'll look at the three most common ways to use derivatives for hedging.

Foreign-Exchange Risks
One of the more common corporate uses of derivatives is for hedging foreign-currency risk, or foreign-exchange risk, which is the risk that a change in currency exchange rates adversely impacts business results.

Let's consider an example of foreign-currency risk with ACME Corporation, a hypothetical U.S.-based company that sells widgets in Germany. During the year, ACME Corp sells 100 widgets, each priced at 10 euros. Therefore, our constant assumption is that ACME sells 1,000 euros worth of widgets:

When the dollar-per-euro exchange rate increases from $1.33 to $1.50 to $1.75, it takes more dollars to buy one euro, or one euro translates into more dollars, meaning the dollar is depreciating or weakening. As the dollar depreciates, the same number of widgets sold translates into greater sales in dollar terms. This demonstrates how a weakening dollar is not all bad: it can boost export sales of U.S. companies. (Alternatively, ACME could reduce its prices abroad, which, because of the depreciating dollar, would not hurt dollar sales; this is another approach available to a U.S. exporter when the dollar is depreciating.

The above example illustrates the "good news" event that can occur when the dollar depreciates, but a "bad news" event happens if the dollar appreciates and export sales end up being less. In the above example, we made a couple of very important simplifying assumptions that affect whether the dollar depreciation is a good or bad event:

(1) We assumed that ACME Corp manufactures its product in the U.S. and therefore incurs its inventory or production costs in dollars. If instead ACME manufactured its German widgets in Germany, production costs would be incurred in euros. So even if dollar sales increase due to depreciation in the dollar, production costs would go up too! This effect on both sales and costs is called a natural hedge: the economics of the business provide their own hedge mechanism. In such a case, the higher export sales (resulting when the euro is translated into dollars) are likely to be mitigated by higher production costs.

(2) We also assumed that all other things are equal, and often they are not. For example, we ignored any secondary effects of inflation and whether ACME can adjust its prices.

Even after natural hedges and secondary effects, most multinational corporations are exposed to some form of foreign-currency risk.

Now let's illustrate a simple hedge that a company like ACME might use. To minimize the effects of any USD/EUR exchange rates, ACME purchases 800 foreign-exchange futures contracts against the USD/EUR exchange rate. The value of the futures contracts will not, in practice, correspond exactly on a 1:1 basis with a change in the current exchange rate (that is, the futures rate won't change exactly with the spot rate), but we will assume it does anyway. Each futures contract has a value equal to the "gain" above the $1.33 USD/EUR rate. (Only because ACME took this side of the futures position, somebody - the counter-party - will take the opposite position.

In this example, the futures contract is a separate transaction; but it is designed to have an inverse relationship with the currency exchange impact, so it is a decent hedge. Of course, it's not a free lunch: if the dollar were to weaken instead, then the increased export sales are mitigated (partially offset) by losses on the futures contracts.

Hedging Interest-Rate Risk
Companies can hedge interest-rate risk in various ways. Consider a company that expects to sell a division in one year and at that time to receive a cash windfall that it wants to "park" in a good risk-free investment. If the company strongly believes that interest rates will drop between now and then, it could purchase (or 'take a long position on') a Treasury futures contract. The company is effectively locking in the future interest rate.

Here is a different example of a perfect interest-rate hedge used by Johnson Controls, as noted in its 2004 annual report:

Fair Value Hedges - The Company [JCI] had two interest rate swaps outstanding at September 30, 2004 designated as a hedge of the fair value of a portion of fixed-rate bonds…The change in fair value of the swaps exactly offsets the change in fair value of the hedged debt, with no net impact on earnings. (JCI 10K, 11/30/04 Notes to Financial Statements)

Johnson Controls is using an interest rate swap. Before it entered into the swap, it was paying a variable interest rate on some of its bonds. (For example, a common arrangement would be to pay LIBOR plus something and to reset the rate every six months).

Now let's look at the impact of the swap, illustrated below. The swap requires JCI to pay a fixed rate of interest while receiving floating-rate payments. The received floating-rate payments (shown in the upper half of the chart below) are used to pay the pre-existing floating-rate debt.

JCI is then left only with the floating-rate debt, and has therefore managed to convert a variable-rate obligation into a fixed-rate obligation with the addition of a derivative. And again, note the annual report implies JCI has a "perfect hedge": The variable-rate coupons that JCI received exactly compensates for the company's variable-rate obligations.

Commodity or Product Input Hedge
Companies that depend heavily on raw-material inputs or commodities are sensitive, sometimes significantly, to the price change of the inputs. Airlines, for example, consume lots of jet fuel. Historically, most airlines have given a great deal of consideration to hedging against crude-oil price increases - although at the start of 2004 one major airline mistakenly settled (eliminating) all of its crude-oil hedges: a costly decision ahead of the surge in oil prices.

Monsanto (ticker: MON) produces agricultural products, herbicides and biotech-related products. It uses futures contracts to hedge against the price increase of soybean and corn inventory:

Changes in Commodity Prices: Monsanto uses futures contracts to protect itself against commodity price increases… these contracts hedge the committed or future purchases of, and the carrying value of payables to growers for soybean and corn inventories. A 10 percent decrease in the prices would have a negative effect on the fair value of those futures of $10 million for soybeans and $5 million for corn. We also use natural-gas swaps to manage energy input costs. A 10 percent decrease in price of gas would have a negative effect on the fair value of the swaps of $1 million. (Monsanto 10K, 11/04/04 Notes to Financial Statements)

Conclusion
We have reviewed three of the most popular types of corporate hedging with derivatives. There are many other derivative uses, and new types are being invented. For example, companies can hedge their weather risk to compensate them for extra cost of an unexpectedly hot or cold season. The derivatives we have reviewed are not generally speculative for the company. They help to protect the company from unanticipated events: adverse foreign-exchange or interest-rate movements and unexpected increases in input costs. The investor on the other side of the derivative transaction is the speculator. However, in no case are these derivatives free. Even if, for example, the company is surprised with a good-news event like a favorable interest-rate move, the company (because it had to pay for the derivatives) receives less on a net basis than it would have without the hedge.

Commodities Hedging::Corporates

2007-09-04T22:01:00.000-07:00

The Hedging Decision
The issue of whether or not to hedge risk continues to baffle many corporations. At the heart of the confusion are misconceptions about risk, concerns about the cost of hedging, and fears about reporting a loss on derivative transactions. A lack of familiarity with hedging tools and strategies compounds this confusion. Corporate risk managers also face the difficult challenge of getting hedging tools (i.e., derivatives) approved by the company's board of directors. The purpose of this article is to clarify both some of the basic misconceptions surrounding the issue of risk as well as the tools and strategies used to manage it.

The Challenge
An effective hedging program does not attempt to eliminate all risk. Rather, it attempts to transform unacceptable risks into an acceptable form. The key challenge for the corporate risk manager is to determine the risks the company is willing to bear and the ones it wishes to transform by hedging. The goal of any hedging program should be to help the corporation achieve the optimal risk profile that balances the benefits of protection against the costs of hedging.

This article will outline seven steps designed to help risk managers determine whether or not their companies stand to benefit from a hedging program.

STEP 1: Identify The Risks
Before management can begin to make any decisions about hedging, it must first identify all of the risks to which the corporation is exposed. These risks will generally fall into two categories: operating risk and financial risk. For most non-financial organizations, operating risk is the risk associated with manufacturing and marketing activities. A computer manufacturer, for example, is exposed to the operating risk that a competitor will introduce a technologically superior product which takes market share away from its leading model. In general, operating risks cannot be hedged because they are not traded.

The second type of risk, financial risk, is the risk a corporation faces due to its exposure to market factors such as interest rates, foreign exchange rates and commodity and stock prices. Financial risks, for the most part, can be hedged due to the existence of large, efficient markets through which these risks can be transferred.

In determining which risks to hedge, the risk manager needs to distinguish between the risks the company is paid to take and the ones it is not. Most companies will find they are rewarded for taking risks associated with their primary business activities such as product development, manufacturing and marketing. For example, a computer manufacturer will be rewarded (i.e., its stock price will appreciate) if it develops a technologically superior product or for implementing a successful marketing strategy.

Most corporations, however, will find they are not rewarded for taking risks which are not central to their basic business (i.e., interest rate, exchange rate, and commodity price risk). The computer manufacturer in the previous example is unlikely to see its stock price appreciate just because it made a successful bet on the dollar/yen exchange rate.

Another critical factor to consider when determining which risks to hedge is the materiality of the potential loss that might occur if the exposure is not hedged. As noted previously, a corporation's optimal risk profile balances the benefits of protection against the costs of hedging. Unless the potential loss is material (i.e., large enough to severely impact the corporation's earnings) the benefits of hedging may not outweigh the costs, and the corporation may be better off not hedging.

STEP 2: Distinguish Between Hedging and Speculating
One reason corporate risk managers are sometimes reluctant to hedge is because they associate the use of hedging tools with speculation. They believe hedging with derivatives introduces additional risk. In reality, the opposite is true. A properly constructed hedge always lowers risk. It is by choosing not to hedge that managers regularly expose their companies to additional risks.

Financial risks - regardless of whether or not they are managed - exist in every business. The manager who opts not to hedge is betting that the markets will either remain static or move in his favor. For example, a U.S. computer manufacturer with French franc receivables that decides to not hedge its exposure to the French franc is speculating that the value of the French franc relative to the U.S. dollar will either remain stable or appreciate. In the process, the manufacturer is leaving itself exposed to the risk that the French franc will depreciate relative to the U.S. dollar and hurt the company's revenues.

A reason some managers choose not to hedge, thereby exposing their companies to additional risk, is that not hedging often goes unnoticed by the company's board of directors. Conversely, hedging strategies designed to reduce risk often receive a great deal of scrutiny. Corporate risk managers who wish to use hedging techniques to improve their company's risk profile must educate their board of directors about the risks the company is naturally exposed to when it does not hedge.

STEP 3: Evaluate the Costs of Hedging in Light of the Costs of not Hedging
The cost of hedging can sometimes make risk managers reluctant to hedge. Admittedly, some hedging strategies do cost money. But consider the alternative. To accurately evaluate the cost of hedging, the risk manager must consider it in light of the implicit cost of not hedging. In most cases, this implicit cost is the potential loss the company stands to suffer if market factors, such as interest rates or exchange rates, move in an adverse direction. In such cases the cost of hedging must be evaluated in the same manner as the cost of an insurance policy, that is, relative to the potential loss.

In other cases, derivative transactions are substitutes for implementing a financing strategy using a traditional method. For example, a corporation may combine a floating-rate bank borrowing with a floating-to-fixed-rate swap as an alternative to issuing fixed-rate debt. Similarly, a manufacturer may combine the spot purchase of a commodity with a floating-to-fixed swap instead of buying the commodity and storing it. In most cases where derivative strategies are used as substitutes for traditional transactions, it is because they are cheaper. Derivatives tend to be cheaper because of the lower transaction costs that exist in highly liquid forward and options markets.

STEP 4: Use the Right Measuring Stick to Evaluate Hedge Performance
Another reason for not hedging often cited by corporate risk managers is the fear of reporting a loss on a derivative transaction. This fear reflects widespread confusion over the proper benchmark to use in evaluating the performance of a hedge. The key to properly evaluating the performance of all derivative transactions, including hedges, lies in establishing appropriate goals at the onset.

As noted previously, many derivative transactions are substitutes for traditional transactions. A fixed-rate swap, for example, is a substitute for the issuance of a fixed-rate bond. Regardless of market conditions, the swap's cash flows will mirror the bond's. Thus, any money lost on the swap would have been lost if the corporation had issued a bond instead. Only if the swap's performance is evaluated in light of management's original objective (i.e., to duplicate the cash flows of the bond) will it become clear whether or not the swap was successful.

STEP 5: Don't Base Your Hedge Program On Your Market View
Many corporate risk managers attempt to construct hedges on the basis of their outlook for interest rates, exchange rates or some other market factor. However, the best hedging decisions are made when risk managers acknowledge that market movements are unpredictable. A hedge should always seek to minimize risk. It should not represent a gamble on the direction of market prices.

STEP 6: Understand Your Hedging Tools
A final factor that deters many corporate risk managers from hedging is a lack of familiarity with derivative products. Some managers view derivatives as instruments that are too complex to understand. The fact is that most derivative solutions are constructed from two basic instruments: forwards and options, which comprise the following basic building blocks:

Forwards Options
- Swaps - Caps
- Futures - Floors
- FRAs - Puts
- Locks - Calls
- Swaptions

The manager who understands these will be able to understand more complex structures which are simply combinations of the two basic instruments.

STEP 7: Establish A System of Controls
As is true of all other financial activities, a hedging program requires a system of internal policies, procedures and controls to ensure that it is used properly. The system, often documented in a hedging policy, establishes, among other things, the names of the managers who are authorized to enter into hedges; the managers who must approve trades; and the managers who must receive trade confirmations. The hedging policy may also define the purposes for which hedges can and cannot be used. For example, it might state that the corporation uses hedges to reduce risk, but it does not enter into hedges for trading purposes. It may also set limits on the notional value of hedges that may be outstanding at any one time. A clearly defined hedging policy helps to ensure that top management and the company's board of directors are aware of the hedging activities used by the corporation's risk managers and that all risks are properly accounted for and managed.

Conclusion
A well-designed hedging program reduces both risks and costs. Hedging frees up resources and allows management to focus on the aspects of the business in which it has a competitive advantage by minimizing the risks that are not central to the basic business. Ultimately, hedging increases shareholder value by reducing the cost of capital and stabilizing earnings.

Quotes and Nuggets from a Trading Seminar!!

2007-09-03T03:59:00.000-07:00

Psychology is the most important component of successful trading. Regardless of whether a trader uses discretionary methods or a mechanical trading system, the proper mindset differentiates successful traders from others.

Six Keys to Success in Trading Futures
1 Correct Mindset
2 Commitment
3 Proper Capitalization
4 Position Sizing
5 Money Management
6 Be Responsible for Your Own Trading

Gordon Gecko was wrong. Greed is not good. (Gecko was the character in the movie "Wall Street.") Greed, fear, anger and all emotions can be a trader's downfall.

Success in trading is its own reward. The money is merely a by-product of that success--not the goal.

Discipline is the one quality that all traders must possess. This is the ability to master your mind, your body and your emotions. Know yourself. Your risk tolerance, your experience and your capitalization will play the biggest parts in determining what you will trade, and how. Lose your ego. Letting your ego influence your decision-making is the easiest way to end your career as a trader.

Five Common Trading Mistakes
1 Trading without a plan or with a poor plan
2 Losing your discipline. Not enough patience.
3 Trading without stops. Canceling stops.
4 Hanging onto a losing position. Turning a winner into a loser.
5 Too much risk. Not enough capital.

A great trader who has made tens of millions of dollars from the stock and commodities markets said the one individual universal reason for failure in trading is the inability to take a loss. The true path to riches lies not with the wins but managing the losses in a prudent and confrontational manner.

The true path to success always must journey through failure. The true winner in futures trading is the one who perseveres. The race is a marathon, not a sprint.

Why to traders and investors fail?
1 Limited trading capital.
2 No experience
3 No psychological preparation.

You are responsible. Win or lose, you are responsible for the outcome. Don't blame the market or your broker. Losses are an opportunity to focus on the problem. Don't get caught up in personal denial.

There is no Holy Grail. There is no get-rich-quick scheme. There is no free lunch. No one else can do this for you. If something sounds too good to be true, it probably is. When it comes to trading, there is no "hoping," no "wishing," and no "praying." There is just the cold, hard reality of the market.

Looking at timeframes when trading a market, start out with the longest first. This would be the monthly charts, then the weekly charts, then the daily charts, and then even the hourly or minute charts. You begin with the bigger picture and work your way down to smaller timeframes.

W.D. Gann's Four Essential Trading Qualities:
1 Patience
2 Knowledge
3 Guts
4 Health and Rest

There you have them. Of all the seminars I have attended, and all the books I have read, and all the successful traders I have personally interviewed, there is a common and very important theme that comes to the surface: Trading success comes less from the specific types of trading methods you employ or the types of markets you trade, or what trading timeframes you use. Trading success comes more from knowing yourself, knowing how to control your emotions, and forgetting about your ego.

Commodities and Portfolio Returns

2007-09-03T01:39:00.001-07:00

Do Commodities Enhance Portfolio Returns?

Commodities as a group, measured by the long-only indices, have a low correlation to traditional asset classes such as fixed income and equities, we would expect a diversification benefit by adding an allocation to commodities to a traditional portfolio. This diversification benefit is often cited as a key reason for making an allocation to commodities. The degree to which commodities provide a hedge against inflation depends largely on the index used to represent commodities.

While we recognize that a tactical allocation to commodities may be beneficial during inflationary periods, over the long-term most commodity prices do not keep pace with the CPI (again, energy being the key exception). For this reason, we believe commodities are better viewed on an individual basis with a focus on those commodities or areas of the commodity market that provide the greatest potential for long term gains.

The Case For Commodities

Recent gains in the commodity markets have been substantial and many are asking if now is a good time to allocate assets to this area of the market. As seen by the returns in the graph below, the major long-only commodity indices posted annualized gains approaching 20% over the past five years. Indeed, rising commodity prices seem to dominate the headlines as of late. Proponents of investing in commodities point to increased demand from emerging markets as a key factor that could drive higher long-term prices. Proponents also point to the time lag in bringing new supply of certain commodities to the market. There can be significant time required to build new oil refineries, steel production facilities and mining operations, all of which are capital-intensive investments and could contribute to supply shortages.

Other points made for investing in commodities include strong performance by financial assets over the past 20 years, driven largely by falling interest rates. While a number of factors could contribute to inflationary pressures going forward, including excessive monetary liquidity and supply/demand imbalances, most commodities, as we have seen, do not constitute a good long-term inflation hedge.

Given the recent gains in commodities, most notably energy-related commodities, it is difficult to make a case that now is a good time to take a long position in an index with a significant weighting in energy. Crude oil has increased five fold since 1998, rising from $10 a barrel to over $50 today, and continues to press toward new highs almost daily. Likewise, natural gas has more than doubled since the end of 2001.

While we recognize that there are a number of factors that could increase demand for natural resources and commodities, we also recognize that current record high prices of many commodities may not be sustainable and may present significant risk. We are also mindful that a slowdown in emerging markets could result in a slowing demand for commodities and put downward pressure on commodity prices, as emerging markets are a primary source of demand for many commodities.

Conclusions and Recommendations

We believe that individual commodities should be evaluated based on their relative attractiveness in order to fully capture the benefit of investing in this area. Based on historical data, energy-related commodities have outpaced inflation and have provided the most attractive returns while agricultural related commodities have failed to keep pace with inflation.

Our conclusion is that accessing commodities through long-only indices is not the most effective means to benefit from this area of the market. While long-only commodity indices provide a simple way to gain exposure to a cross section of the commodity market, we believe that commodities are better viewed on a sector-specific basis to determine which commodities may make compelling investments. Other vehicles, such as managed futures strategies, may be more appropriate when seeking to gain exposure to commodities.

We also recognize that macro economic trends will likely favor real assets going forward and that some commodities will benefit from increased global demand. We recommend that clients consider the available long-only alternatives to protect portfolios from rising inflation.

While commodities represent an opportunity to add exposure to an asset class with a low correlation to equity and fixed income, their ability to act as a long-term hedge against inflation remains unclear because most commodities have not kept pace with inflation over the long-term. Additionally, the diversification benefit to an already diversified portfolio that results from their low correlation to other asset classes does not appear compelling enough to warrant a strategic allocation to the long-only indices. The same diversification benefit could be achieved by adding other asset classes to a portfolio with lower volatility. Additionally, much of the returns offered by these investments come from sources other than the underlying commodities themselves. By approaching physical commodities and natural resources from a sector basis we believe investors can benefit from those areas that have the most potential for producing the greatest returns and benefits to the portfolio.

Commodities:A Distinct Asset Class

2007-09-03T01:31:00.000-07:00

As we have seen, commodities encompass a wide range of products including basic and precious metals, agricultural and food products, and energy related products such as crude oil and natural gas. We view an asset class as a group of securities with similar characteristics and properties that tend to react in similar way to economic factors.

For example, equities, fixed income and real estate are examples of pure asset classes because their returns are driven by similar factors. Additionally, securities in these different assets classes are mutually exclusive of one another indicating that an equity security is distinct from a fixed income security and vice versa. Given this framework, do commodities represent a distinct asset class?

We believe that commodities are most accurately viewed individually or on a sector basis, rather than collectively as one asset class. The reason for this is that the returns of one type of commodity may have little correlation with the returns of another type of commodity. An example would be an agricultural commodity such as wheat or corn and crude oil. Weather patterns in certain areas of the world will
impact corn or wheat prices, whereas these same weather patterns will have little or no impact on the change in oil prices, which may be driven by geopolitical events or other factors. Our analysis of the correlation between the prices of several commodities confirms this.

For example, the long-term correlation between the price of crude oil and gold is -0.03. Similarly, the long-term correlation between the price of sugar and crude oil is -0.37%. Therefore, when analyzing investments in commodities, we believe it is important to evaluate commodities individually or on a sector basis and determine which commodities make sense as tactical or strategic investments.

Sources of returns--Commodity Indices

2007-09-03T01:10:00.000-07:00

Long-only commodity indices derive their returns from several sources

Collateral Yield: In a long-only commodity index, futures positions are unleveraged, meaning they must be fully collateralized, usually with Treasury Bills. Therefore, a portion of the return will come from the underlying cash position that supports the futures contract. Some managers seek to actively manage this underlying cash position in order to enhance the overall return of products tracking the index. Others simply invest the cash in short-term Treasuries, which are then rolled over at maturity. Depending on the type of fixed income security used to collateralize positions in the long-only commodity index, the return on the underlying cash position could range from 2-4%.

There is some debate as to whether or not the yield on the underlying cash position should be included as a source of commodity index returns, because an investor could theoretically achieve this return by simply allocating cash to Treasuries and because this portion of return has no direct relation to the actual commodities. If this portion of the return were not included in the long-only indices, it would alter their long-term performance.

Rebalancing Yield: A second source of return from long-only commodity indices comes from what is known as the rebalancing yield. This portion of the return is attributable to the fact that commodity prices are not correlated with each another due to the varying factors that affect the price of each commodity. Because commodities do not rise and fall together, an index consisting of many commodities that is rebalanced regularly on a price basis is able to extract a return based on the tendency of commodities to revert to their mean prices. Historical data confirm that a price-rebalanced index will tend to extract a return from “buying low” and “selling high” the uncorrelated commodities.

Robert Greer, senior vice president and portfolio manager for the PIMCO Real Return Fund, estimates that according to historical data, a commodities index can earn a rebalancing yield of approximately 2.5% on a long-term basis. The frequency of rebalancing is of particular importance, as data has shown that indices that rebalance more frequently are able to extract a greater return than those that rebalance less frequently.

Roll Yield: In addition to these two sources of return, a long-only commodity index will have gains associated with the change in price of the underlying commodities and the futures contracts on those commodities. For example, as a contract nears expiration, it will be “rolled over” to purchase new contracts on the commodity. At the time the position rolled over, there will be a gain or a loss depending on whether the underlying commodity has risen or declined in value. This portion of return is known as the “roll yield,” and will depend in large part on whether the underlying commodities are increasing or decreasing in value as well as the allocations of various commodities in the index.

Risk Premium: Finally, participants in the futures market can earn an insurance (or risk) premium since the long position is absorbing price risk that commodity producers, who are natural sellers, do not want. There may often be an imbalance between those wanting to sell futures contracts (like a farmer) and those willing to purchase futures contracts (such as a cereal manufacturer). The consumer (buyer of commodities) has less price risk than the producer because the end user can raise prices on the final product.

Investors in the futures markets serve to balance the market demand and in return, they are compensated for providing liquidity and assuming price risk.18 As a result, the investor is able to extract a return and profit from participation in the market and achieve an inherent positive return, or a compensation for the risk assumed by the investor. This component of return is closely related to the gain or loss on the underlying futures contract discussed previously.

An investor purchasing a futures contract and holding it to expiration will capture some risk premium in the marketplace and will also have a gain or loss depending on where the price settles at maturity. While these components of return are shown separately, they are closely linked and in some cases indistinguishable.

In evaluating the sources of long-only commodity index returns, we believe it is important to focus on those sources that relate specifically to an investment in commodities. As figure 1 shows, the key sources of return for a long-only commodity index are the gain or loss on the underlying futures contracts, the rebalancing yield, and a risk premium for providing liquidity to the market. The yield on the underlying cash position may or may not be considered as a source of returns to the index, although returns of the major indices include these in their total return calculations.

In the final analysis, the two main sources of return that relate directly to commodities are the gains and losses on the underlying futures contracts and the return that will come from providing liquidity to the markets due to the nature of futures contracts and the commodities markets. When analyzing long-only commodity index returns, it is important to focus on those sources that are related to commodities rather than those that are exogenous to the actual changes in prices of the futures contracts.

Investors who consider an allocation to commodities should also recognize the potential volatility of returns for long-only indices. In 1998, for example, the GSCI declined by 35%, a substantial one-year loss that was driven in large part by difficulties in the emerging markets. While this is comparable to the 30% decline in the Russell 2000 Growth Index during 2002, commodities do not provide the same long-term upside as small cap equities, with the key exception being energy related commodities, which have provided higher real returns. The longer-term standard deviation of the GSCI is close to 20% and, while this index has shown strong gains, the impact of the oil crisis of the 1970s heavily influenced the returns of this index. For example, from January 1970 through January 1980, the GSCI increased at an annualized rate of 21.8%, in large part due to the steep rise in oil prices during this time period.

Analysis of Commodity Indices!!

2007-09-03T00:39:00.000-07:00

In calculating returns, the GSCI, RICI and the DJ-AIG indices use an arithmetic weighted average of the underlying commodities to represent the index. The CRB Index utilizes both geometric and arithmetic averages of the prices of the underlying commodities to construct returns. Geometric averaging creates lower overall volatility of returns than arithmetic averaging and, according to the CRB, geometric averaging “has the statistically attractive property that successive percentage changes in a component’s price do not alter that component’s relative weight in the index.”

Arithmetic averaging, on the other hand, causes the relative weight of a component to increase (or decrease) as that component appreciates (or depreciates) in value. The method used by the CRB allows the index to maintain equal weight in the 17 individual components so that no single commodity has undue impact on the index. The index is also less subject to the fluctuations associated with temporary supply and demand imbalances in any one commodity.

Compared to other long-only commodity indices, the DJ-AIG offers a more balanced mix of commodities and is not as impacted by the performance of the energy sector as the GSCI. In terms of liquidity, the GSCI and the DJ-AIG have several products that seek to replicate the returns of the indices, which makes them more accessible to institutional investors. These indices are also the most widely followed and considered proxies for the commodity market. In analyzing performance, the CRB Index has trailed the other indices over time by a significant margin. This is due in part to its larger weighting in “softs” and lower weighting in energy related commodities compared to the other indices.

Eminent International Indices-Commodities

2007-09-03T00:24:00.000-07:00

The following is a brief summary of several long-only commodity index products that are available to investors seeking broad exposure to the commodity markets.

Commodities Research Bureau (CRB) Index: The CRB Index began trading on New York Futures exchange in 1986 and is the oldest of the indices. While futures on the index began trading in 1986, it was first calculated by the CRB in 1957 and has data going back to 1958. The index includes 17 individual components, which are equally weighted. This is one of the key drawbacks to the index because a product like corn or wheat will have the same weighting in the index as crude oil, when oil has significantly more economic impact than corn.

Goldman Sachs Commodity Index (GSCI): The GSCI index was created in 1992 and is available in the form of a single futures contract on the Chicago Mercantile Exchange. While it was launched in 1992, the GSCI has back-tested data going back to 1970. The index consists of 24 individual components and weights are assigned based on a five-year moving average of world production values. The result is that the index has a heavier weighting in commodities with more economic importance and higher liquidity. Consequently, the GSCI has a weighting of nearly 70% in energy related commodities making its performance highly sensitive to the energy markets and fluctuations in energy prices. The GSCI is rebalanced annually, and utilizes an arithmetic average in constructing returns for the index. Given its liquidity and longer performance data, the GSCI is often used as a proxy to analyze commodity returns.

Rogers International Commodity Index (RICI): Jim Rogers, a private investor and former hedge fund manager, created the RICI in 1998. Its weightings are based on world consumption patterns of raw materials and their relative importance in international commerce according to the research of Jim Rogers. The RICI is the broadest and most comprehensive index, consisting of 35 different commodities. Some of these components are less liquid and include obscure commodities such as flaxseed, azuki beans, canola oil, and raw silk. Weights for the individual components are fixed and the index is rebalanced monthly. The RICI is only available through a limited partnership and while it offers the broadest exposure of the major commodity indices, there could be some risk related to the liquidity of some of the index components.

Dow Jones AIG (DJ-AIG) Index: The DJ-AIG was established in 1999 and relies primarily on liquidity data and, to a lesser extent, dollar-adjusted production data in determining the relative weights of commodities in the index. All data used in both the liquidity and production calculations are averaged over a five-year period to determine component weights.11 The index holds 20 components and limits any related group of commodities to 33% in order to ensure diversified exposure to commodities. Like the GSCI, the DJ-AIG index is rebalanced annually. The reason for using liquidity data rather than production data is that liquidity is an important indicator of the value placed on a commodity by financial and physical market participants. Production data alone can underestimate the investment value that financial market participants place on certain commodities.

Commodities Investing-III::Participants & Exposure

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There are essentially two ways for investors to gain broad exposure to changes in commodity prices. First, there are several long-only commodity indices that give investors exposure to passive long positions in a number of commodity futures contracts. This allows them to participate in gains that would otherwise only be earned from holding individual positions in these contracts. An investment in a commodity index does not give the investor ownership of the cash commodity, but rather, an exposure to changes in the future expected price,7 thus allowing an investor exposure to a broad section of the commodities market.

The second way for investors to gain broad exposure to commodities is through managed futures products that take both long and short positions in various commodities using different trading strategies. There are advantages and disadvantages to each type of product. We will first look at long-only commodity indices, how they are constructed, and how an investor might utilize these products to invest in this asset class.

LONG-ONLY COMMODITY INDICES
Just as stock index funds seek to replicate a portion of the equities market, long-only commodity indices give an investor exposure, typically through futures contracts, to a crosssection of the commodities market. As with equity indices, that have specific weights in individual securities, commodity indices have weights to certain areas of the commodity market, such as energy, grains, metals, or livestock.

Commodity Incdices and their Construction
Commodity indices can be constructed using several different methodologies, all of which will impact the returns and the underlying volatility of the index. The three primary methodologies include production weighting, optimized weighting, or equal weighting.

Production weighting involves assigning weights based on a moving average of world production.A production-weighted index will also have a heavier weighting in sectors that may be more important in the economy such as oil and natural gas. As a result, these allocations will have a disproportionate impact on the performance of the index.

An optimized-weighted index includes specific constraints and objectives such as correlation with inflation, negative correlation to equities and fixed income, a focus on liquidity, and the sectors that are most relevant.

Finally, an equal-weighted index keeps price fluctuations in any one sector from disproportionately impacting the index, but does not over/underweight sectors that may be more important in the economy, such as oil and natural gas, which are key elements in most industrial economies.

Commodities Investing-II::Participants

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There are two groups of participants in the futures markets.

The first group of participants comprises buyers and sellers of goods, known as commercial participants, or hedgers. This group includes farmers and other producers of goods who wish to sell their products at a specified price as well as buyers of commodities who wish to hedge against price increases.Commercial participants are not in the futures markets to make a profit, but rather to protect themselves against price changes. For example, if the price of corn drops before the time the farmer sells his futures contract, he is still guaranteed the price at which he sold the contract.

The second group of participants in the futures market is investors (also known as speculators). Investors serve an important function in the futures market because there is often an imbalance between those wanting to sell contracts and those wanting to buy. Investors provide much needed liquidity to the futures markets and are compensated for taking on this role.

One of the distinguishing factors regarding the futures markets is that they exist primarily to protect against price uncertainty for buyers and sellers of goods. As a result, most of the participants are not in the market to make a profit, but
rather to hedge against price risk. This can sometimes create opportunities for investors (or speculators) to make a profit.

Commodities different and Paper Assets!!
Commodities differ from paper assets (equity and fixed income) in that they require storage costs. While paper assets can be held in brokerage accounts at little or no cost, commodities such as crude oil, wheat, or livestock obviously cannot be stored in a vault or electronically in a database and storage costs for commodities can sometimes be significant. Storage costs must be a consideration for an investor, as they will impact the pricing structure of futures contracts of individual commodities. For this reason, the change in the price of futures contract for a commodity may vary from the change in the price of the underlying commodity because futures contracts take into account these storage costs. As a result of storage costs, longer dated futures contracts (for example, delivery in six months), will generally be priced higher than shorter dated futures contracts for delivery in one month.

Commodities Investing!!-I

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Commodities are broadly defined as “generic, largely unprocessed, goods that can be processed and resold.” Investing in commodities represents an investment in the basic production inputs in the economy. By investing in commodities, an investor gains exposure to changes in commodity prices, which are ultimately driven by global supply and demand. A growing economy will see increased demand for commodities due to increased consumption, which puts upward pressure on prices. Higher prices typically result in increased supply coming online, which consequently drives prices lower. The key factors helping to drive demand over the long-term are a growing population, industrialization, and consumption while supply can be impacted by geopolitical events, weather patterns, or available capacity for processing commodities.

INVESTING IN COMMODITIES: AN OVERVIEW OF THE FUTURES MARKET
Investing in commodities is usually accomplished through the use of futures contracts and, therefore, understanding how the futures market functions is important.

Futures markets have been in existence for centuries and provide an efficient vehicle for buyers and sellers of goods to reduce price uncertainty and risk. A simple example would be a farmer who harvests a corn crop in the fall, but wants to guarantee a selling price several months prior to the harvest. The farmer can go to the futures market and sell a contract, whereby the purchaser of the contract agrees to buy his corn at a set price several months in the future. This transaction essentially eliminates the uncertainty that corn prices could drop prior to the time the farmer brings his crop to the market.

Alternatively, a company that buys large quantities of corn, may want to hedge its risk of rising corn prices by locking in a set price for some point in the future by buying a futures contract on corn. Although the purchaser of a futures contract agrees to take physical delivery of the goods upon expiration of the contract, most futures contracts are settled on a cash basis. In purchasing a futures contract, the investor posts a margin, that represents a percentage of the actual price of the futures contract and can be as little as 5% of the cost of the contract. As the price of the underlying commodity fluctuates and the value of the contract changes, the account is “marked to market” on a daily basis and the investor may be required to post additional funds to the account if the account value falls below a specified level.

Agri Commodities--Hedging

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Though the history of commodities market in India dates back to 1900s the organized and regulated market commenced hardly 4 years ago with the inception of three national level exchanges Multi Commodity Exchange (MCX), National Commodities Derivatives Exchange, and National Multi Commodity Exchange (NMCE).

The chief economic justification for the creation of a regulated commodities futures and options market is to enable producers to hedge the price risk that arises from their normal business operations.

Risk Management Strategies-Spot Market
While some agricultural producers do not engage in any type of hedging or marketing strategy - they simply sell their crop in the cash market upon harvest and accept the prevailing price - many producers utilize hedging strategies made available by their local grain operators. The more popular of these strategies include the forward contract, the hedge-to-arrive (HTA) contract, and the minimum price contract.

For agricultural producers who are naturally long wheat, pulses or sugar, the exchanges enable the construction of hedging strategies that reduce the uncertainty of the price received from grain sales. These commodity futures can be used to replicate many of the heding strategies offered by the spot market and more importantly, can be used to create other strategies that are more responsive to your expectations and budget.So why bother to construct hedging strategies yourself using commodity futures? Why not take the strategies offered by local grain operators granted?

The Advantages of having a own hedging strategy:
There is, of course, the old adage, 'If you want something done right, do it yourself.' There is no substitute for the satisfaction and sense of control that comes from knowing exactly what is going on. That is, knowing how the hedge works, knowing what you have to gain or lose, and knowing what to watch out for, if anything. The latter, in particular, is really the best way to avoid a financial nightmare down the road. And such a financial nightmare was realized by corn producers across several states in the United States in the summer of 1996 who relied on HTA contracts to hedge and who didn't fully understand the implications of the contract.*

Beyond this, you may have other reasons to reduce your dependency on the local elevator.

Perhaps you feel that their fees are too high, or that the terms of their contracts are too restrictive.
Maybe you find disputes too hard to reconcile.
Or it could be that you want to diversify business exposure and not conduct all of your business with the same counterparty. The exchange commodity futures eliminate this counterparty credit risk because every transaction is backed by the financial guarantee of the clearing corporation.
When you hedge using a strategy provided by the elevator operators, they in turn often establish an offsetting hedge in the corresponding exchange. So by establishing the hedge yourself directly in the futures and options market, you're simply cutting out the middle man.

Hedging Strategies with Exchange Commodity Futures:

The wide variety of commodity futures market provides the producer with a multitude of choices, much more so than with the spot market operator. Using futures or options or combinations thereof, the producer can construct a hedge that best conforms to his or her price expectations and operating budget. For example, the HTA contract and minimum price contract can both be replicated using CBOT futures and options. These are among the simplest of hedging strategies. The hedging strategies can be further customized, for example, by varying the strike price or expiration of the component options in attempt to improve the overall performance of the hedge, all of which is again made possible because of the extensive listings of exchange contracts that are available for trading.

A chief concern and in some cases, limiting factor, when using futures and options is the operating cash that is needed while the hedge is active. In general, the outright selling of a futures contract or an option contract generates a margin requirement which must be covered by cash in the account. The premium of a purchased option must be paid for in full upfront. And cash is required to cover the day-to-day loss, if any, on the hedge position. For producers, the latter becomes an issue during periods of rising prices. While the premium of purchased options is a cost, the others are not: the act of closing the hedge position eliminates the margin requirement and the capital loss, if any, on the hedge position itself should be recouped upon selling grain in the cash market at a higher-than-expected price. Because of its importance, notional cash requirements are listed for each of the hedge strategies described at right. Some require less operating cash than others. In particular, the hedge strategy, "Zero-Cost Collar with Upside", is not capital intensive yet still provides a floor selling price while leaving open the upside.

Constructing your own hedge using exchange futures is at first a learning process. Think of the time spent as an investment in your business. The agricultural futures that trade on the exchanges will continue to be around. Once you learn these hedging techniques, you can use them for years to come, and so can your children and their children.

Managing the Futures & Option Hedge

A hedge is not put in place and then forgotten. Rather, it is dynamic. It must be managed to properly respond to changing price expectations. For example, the size of the hedge may need to be reduced or increased, or some or all of the hedge may need to be rolled to another contract month. The on-going management of a hedge using exchange futures is much easier than that with the local elevator for the following reasons:

(1) Information. The free dissemination of prices by the exchange enables calculation of the value of a futures and options hedge on an almost real-time basis.

(2) Accessibility. With regular trading in the pit and overnight electronic trading, exchange contracts can be bought and sold quickly and easily almost any time of the day, allowing the producer to instantly react to a changing market environment.

(3) Variety. The many futures and options contracts that are available for trading not only permits a variety of hedges to be constructed, but also enables flexibility in managing those hedges.

Note: The above article is furnished keeping in view the International commodities market, hence the mentioning of Options can be seen.