Pre-Budget expectations for commodity markets: Religare Retail Research

According to Religare Retail Research, traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery, says the report.

Pre- Budget Expectations for Commodity Markets: Religare Retail 

The market, like every time, has huge expectations and this time, hopes are revolving around lowering of subsidy burden, widening the tax net, supportive policies for the industry and rational allocation of funds. Also, some key points present in the agenda of the new government which should form part of the union budget should be to re-invigorate investment cycle and reviving Indian economy on a priority basis.

With lower crude prices, government is now in a better position in terms of its fiscal balances as oil imports occupies a major chunk in our im-port bill. Commodity futures trading also deserves attention this time, keeping in mind government’s agenda of Make in India. A large number of measures are required to bring back liquidity and to make market more efficient. 

Union Budget Expectations for Commodity Trading 

Amendment of FCRA: Traders and investors from commodity derivatives market are expecting the government to announce steps to restruc-ture the Forward Contracts Regulation Act (FCRA). This would increase depth in the market and will help in efficient price discovery. There is a need to increase market participation by allowing banks, MFs, FIIs which will also help in preventing price manipulation and help hedgers to efficiently hedge their exposure in physical markets. 

Abolition of CTT: Market participants are expecting the government to re-duce the Commodities Transaction Tax (CTT) which was levied in year 2013 on metals, bullion and a few processed agri commodities. 

Levy of CTT was strongly opposed by commodity exchanges, traders, bro-kers and investors. Commodity trading in India is just 10-year old and get-ting away with CTT may lure more participants, thereby increasing the over-all turnover. In India, more than 80% of the trade volumes take place in bul-lion, metals and energy and CTT has resulted in a significant drop in trading volumes in these segments. Unlike in stocks or agri commodities, daily movement in the above mentioned commodities are generally very low, re-sulting in most of the profits that a trader makes, being lost in the existing charges. FMC needs to take up with the Finance Minister on the need to reduce CTT to bring back liquidity and market depth in the commodity futures trading in the country. The CTT should be reduced to Rs. 1 per crore of trading to encourage the markets and the amount collected should be diverted to improve warehousing and infrastructure facilities. 

Union Budget Expectations for Base Metals Industry 

A reduction in excise duty on copper is widely expected this time, in order to improve the cost competitiveness of Indian capital goods companies. 

The government’s plan to turn India into a manufacturing hub will need a big budget boost. For this, a lot of metal will have to be imported into the country and hence import duty on ores and metals require a slash in import duty. This will likely boost metals’ market in India. 

Union Budget Expectations for Energy Industry 
Finance Minister Arun Jaitley may look at re-imposing five per cent customs duty on crude oil imports to shore up revenues by $3 billion and create a level-playing field for domestic producers. 

Presently, the government does not levy any import or customs duty on crude oil imports. On the other hand, domestically produced crude oil attracts two per cent central sales tax, something which imported oil is exempted from.

Union Budget Expectations for Agri Commodities 

Exemption of CTT for processed agricultural commodities to ensure a pickup in volumes in the futures market 

Passing on benefits of a fall in petrol/diesel prices to ensure reduction in freight charges 

Investment funds in warehousing sector to prevent wastage of food 

Bank accounts for farmers for each and every household for direct transfer of subsidies and loans 

Subsidized loans to farmers and safeguarding them from crop losses through crop insurance 

Availability of quality agri inputs like fertilizers, seeds and advanced technology inputs 

Providing irrigation facilities and electricity at cheap rates to farmers 

Upgrading weather forecasting system – IMD, for accurate monsoon forecasts which could enable farmer to take informed decisions. 

Investments in transportation and infrastructure like roads and railways to reduce transportation costs for farmers for their produce 

Custom Duty on Gold will be Reduced From 10% to 6% Likely on Budget Day.

The government is likely to announce a reduction in the customs duty on gold and the setting up of special notified zones for gems and jewelry in the budget.

The customs duty on gold is likely to be brought down to 6 per cent from 10 per cent in the wake of a significant decline in the import of the yellow metal.

The setting up of notified zones will boost the manufacturing of gems and jewellery, which is one of the sectors identified in the "Make in India" programme of the Narendra Modi-government.

"Gold imports are declining continuously. The gems and jewellery sector contributes significantly to the country's total exports. On account of this, we are expecting a cut in the import duty," commerce ministry officials said.

Gold imports in December declined to 39 tonnes from 152 tonnes in the previous month. The export of gems and jewellery has fallen 3.73 per cent year-on-year to $3 billion in January.

"The low duty will curb the smuggling of precious metals, increase affordability of gold jewellery in the domestic market and enhance the cost-competitiveness of gold jewellery manufacturers in the export market," analysts said.

The gems and jewellery sector, which employs about 3.5 million people, accounted for almost 13 per cent of exports in 2013-14.

The sector is one of the 25 areas identified under the "'Make in India" programme, which aims at attracting domestic and foreign investments to boost manufacturing and create jobs.

The notified zones would also import and trade in rough diamonds.

"The mining companies will be taxed to the extent of invoices raised to Indian companies, eliminating middlemen involved in the trade. This will help India to become a rough diamond trading hub, and especially help small diamond polishing units in India," CARE Ratings said in a research note.

Simultaneously, the government may hike the import duty on gold and silver jewellery to boost local manufacturing.

Officials indicated that the Centre could hike the duty on gold jewellery to 20 per cent and silver jewellery to 25 per cent from 15 per cent. The move will protect the interest of small artisans and provide an incentive to the local manufacturers of jewellery.

In the run-up to the elections, the BJP had promised to ease restrictions on gold imports as the curbs had led to smuggling. Modi had said any action on gold should take into account the interest of the public and traders and not just economics and policy.

Copper Technical Outlook

Copper got a bit of press attention recently with headlines of a plunge in price. This was in early January and I hadn't looked at the copper chart for a few days and I was gobsmacked when I did. A plunge they say?! What a load of baloney!! If that was a plunge then they are in for a big shock later this year if my analysis is correct.

But let's not get ahead of ourselves. Let's start with the small picture and then come back to the big picture which will reveal the likely shock in store.

Copper Daily Chart

The recent low was a "three strikes and you're out" low consisting of three consecutive lower lows. This low was also accompanied by triple bullish divergences on the Relative Strength Indicator (RSI) and Stochastic indicator. This generally leads to a significant rise and while price has risen from that low the nature of the rise is nothing to rave about.

Price has so far failed to take out the January 2015 high at US$2.65 which is denoted by the lowest horizontal line. Taking this into consideration, I believe price may be headed for a fourth lower low which is also accompanied by quadruple bullish divergences on the same lower indicators. That occurring really should lead to a substantial rally. Let's see.

The Bollinger Bands show price bouncing up to the upper band and perhaps one last move back to the lower band is in store before a decent rally takes place.

Other points of resistance are denoted by the higher horizontal lines which stem from the December 2014 low and December 2014 high and I favour any coming rally to take out these levels.

Now let's skip to the monthly chart to begin examining the bigger picture.

Copper Monthly Chart

The RSI and Stochastic indicator are both in oversold territory so a rally should be on the cards shortly. However, both these indicators have readings showing new lows so any rally from here is likely to be a bear market rally. I would like to see the final low be accompanied by bullish divergences on the lower indicators.

I have drawn an Andrew's Pitchfork which shows price trending down within the upper channel of this bearish pitchfork. If a rally is to take place soon then I am looking for price to test the upper channel line. And considering I expect a bear rally only then price should be rejected at this upper trend line.

So where is the final low likely to be?

I have drawn a green highlighted circle which shows where price exploded higher in a parabolic move. This area is at the 2008/09 lows of US$1.27. Price plunged into that low and them immediately launched higher in explosive style. Price often eventually corrects to these areas and I favour exactly that to play out here.

I have added Fibonacci retracement levels of the move up from 2001 low at US$0.60 to the all time high in 2011 at US$4.65. I am looking for a deep retracement that closes in on the 88.6% level at US$1.06 which would see price clipping the zone whereby price launched higher parabolic style.

Price putting in a low there around mid 2016 would also be at support from the middle trend line of the Andrew's Pitchfork.

Let's now look at the yearly chart to get another perspective.

Copper Yearly Chart

The recent high in 2011 showed a bearish divergence on the RSI and Stochastic indicator. These indicators now appear to be trending down and not looking particularly promising for the bulls.

I have added the same Fibonacci retracement levels from the monthly chart just to give a different perspective.

I have also added a Fibonacci Fan which shows the 2008/09 low was around support given from the 76.4% angle. I am looking for the next major low to clip the 88.6% angle. Time will tell.

If I am reading this correctly, then a massive 5 point broadening top is in play and price is now headed down to make a point 4 low. In this scenario, the 2006 high was point 1, the 2008/09 low point 2, the 2011 high point 3. If we do indeed get a point 4 low then I expect price to once again explode to new all time highs over the coming years as price eventually puts in the point 5 high.

And I'd like to see the final point 5 high be accompanied by triple bearish divergences in the lower indicators.

So while the move down in early January garnered some headlines, it really wasn't a major plunge. The real plunge is still to come. And expect much bigger headlines to come with it!

Author: Austin Galt

The Global Death Cross Just Got "Deathier"

"X" continues to mark the spot of the death of global investor rationality...

19 "policy easings" since the start of the year have surged global equity prices to record highs but has sent expectations for global GDP growth to cycle lows...

When does the foundation of faith in central planners start to break?

WTI Crude Slumps To $50 Handle On Larger-Than-Expected Inventory Build

API released its crude oil inventory data to subscribers and it printed an enormous 14.3 million barrel build (EIA tomorrow forecast at 3 million barrel build). This has sparked further weakness in WTI (not helped by refinery strikes, refinery fires, and storage capacities), pushing it to a $50 .

WTI back with a $50 

One word - Stabiliteee.....

India Lifts Ban On Bank Gold Imports: Gold Can Again Be Used As Loan Collateral

One week ago we reported that central bank purchases of gold in 2014 were the second highest in the past 50 years, driven by purchases out of Iraq, Kazakhstan and - most of all - Russia, with no offsetting selling. But what about other more conventional sources of demand? Take jewelry, which while very strong in the beginning of the century, dropped off after the Great Financial Crisis, and then tumbled again after India imposed numerous restrictions on gold imports, which however merely forced the local population to find novel ways of smuggling gold into the country.

This is what the WGC had to say about gold jewelry demand in 2014.

Having suffered weak year-on-year comparisons for much of 2014, jewellery demand rallied to a strong finish, reaching 575t in the fourth quarter – 1% higher than Q4 2013. The sector was buoyed by good festival- and wedding-related demand in India, as well as by the seasonal holiday effect in the US and UK. Global annual jewellery demand of 2,152.9t, although down 10% year-on-year, was above the five-year average by a comfortable 5% margin. 2014 was a standout year for Indian jewellery. Demand reached a record 662.1t, topping the previous year’s total by 8%. This in spite of government measures designed to restrict gold imports being in place for much of the year. Wedding- and festival-related purchases drove robust demand of 179.1t in the fourth quarter, up 19% over Q4 2013. Indeed, the second half of the year was the strongest H2 in our data series (from 2000), up 37% on H2 2013.

US jewellery demand was again notable for its improving trend: Q4 was the seventh consecutive quarter of year-on-year growth and the strongest fourth quarter since 2009. Similarly, 2014 full year demand of 132.4t was the highest for five years. That being said, it clearly has to be acknowledged that the market remains far  below pre-crisis levels of jewellery demand, which between 2000 and 2006 averaged 360t per year.

In considering jewellery demand, it is interesting to look at the contribution that the sector has made over recent years to the accumulation of above-ground stocks. Jewellery is by far the largest component of above-ground stocks of gold – accounting for almost half of the 177,200t of gold estimated to be held by private owners and central banks. Jewellery consumption less recycling provides a fairly good proxy for net demand (as the vast majority of recycled gold will be old jewellery). In years gone by net jewellery demand regularly added as much as 2,000-2,500t per year to above-ground stocks. This plunged to less than 100t during the depths of the global financial crisis as distress selling of gold skyrocketed in tandem with a slump in jewellery demand.

The last two years have seen net jewellery demand recover to exceed 1,000t. This is partly due to a firming of jewellery demand as the world has emerged from the crisis. But by far the greater impact comes from the recycling sector and the sharp reduction in the volumes of gold being sold back onto the market. Above-ground stocks of jewellery should continue accumulating at a similar rate as we expect recycling to remain low in 2015, counterbalancing the recent growth in  mine production.

In short, even with extended draconian measures created by India to prevent capital account outflows as a result of uncontrolled gold imports (which still take place only "under the table"), a whopping 1000 tons of gold ended up in the form of gold trinkets in 2014 mostly in India, and to a lesser extend in China.

All of that is about to change: earlier today India's Economic Times reported that the RBI, surely facilitated by the drop in oil prices - a key import for India - has finally lifted its ban on imports of gold coins and medallions by banks and trading houses.  The RBI in a notification also said banks are permitted to import gold on consignment basis. Domestic sales will be, however, permitted against upfront payment only.

"While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed," it said.

The RBI and the government have been receiving requests for clarification on some of operational aspects of guidelines. Aiming to tame the then widening current account deficit (CAD), the central bank in August 2013 had prohibited imports of gold coins and medallions besides restricting inbound shipments of the metal.

Under the 80:20 scheme, which was withdrawn on November 28 last year, gold imports were linked with its exports.

The notification further said the obligation to export under the scheme will continue to apply in respect of unutilised gold imported before November 28, 2014.

"Banks are free to grant gold metal loans," it said, adding that Star and Premier Trading Houses (STH/PTH) can import the metal as per entitlement without any end use restrictions.

And it's not just jewelry: per the RBI announcement:

"Nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans."

Why is that important? Because as we wrote in January 2013 in "Don't Show Bernanke This Chart Of Gold Loans In India", before the import ban, gold in India was most certainly money, and the amount of gold loans being created in India was simply exponential.

 However, since the importing of gold and its reuse as a money-equivalent collateral meant even more undesired capital outflows, the RBI was forced to halt the practice. Until now.

What all of the above simply means is that the government, tired of fighting a losing war with gold smugglers, has opened up one more avenue by which gold can enter the country on an official, and taxable basis, and as a result physical gold will now resume flowing into India officially, a process which depending on how much gold is being mind out of the ground could mean a rapid depletion of the net available gold in any one period. 

It also means that going forward, India's true gold demand will finally be on the books, as banks find numerous loopholes to pass on the imported gold to end consumers - either in physical or loan form - only this time with the total tonnage once again being officially represented, as was the case in previous years.

By way of example, gold imports surged by 8.13% Y/Y to $1.55 billion in January after the initial RBI restrictions were eased. Expect this number to spike that much more in the coming months as banks rush to reload on physical, especially with paper gold prices determined mostly by ETFs and manipulated by central banks, continue to make purchases (in most currencies, and certainly the dollar) increasingly more attractive, just as the CEO of Rosneft explained is happening to oil right now.

Finally, for those who are unaware, India is considered the largest importer of gold - a title it shares on again, off again with China, the bulk of whose gold imports are also undocumented as they end up almost exclusively in some bonded warehouse where the gold is used as (infinitely) rehypothecated collateral for Commodity Funding Deals and/or in the vault of the PBOC.

What Russians Think Of Western Sanctions

I parse the Russian media (corporate and social) on a daily basis and I am always amazed at the completely different way the issue of western sanctions is discussed.  I think that it is important and useful for me to share this with those of you who do not speak Russian.

First, nobody in Russia believes that the sanctions will be lifted.  Nobody.  Of course, all the Russian politicians say that sanctions are wrong and not conducive to progress, but these are statements for external consumption.  In interviews for the Russian media or on talk shows, there is a consensus that sanctions will never be lifted no matter what Russia does.

Second, nobody in Russia believes that sanctions are a reaction to Crimea or to the Russian involvement in the Donbass.  Nobody.  There is a consensus that the Russian policy towards Crimea and the Donbass are not a cause, but a pretext for the sanctions.  The real cause of the sanctions is unanimously identified as what the Russians called the "process of sovereignization", i.e. the fact that Russia is back, powerful and rich, and that she dares openly defy and disobey the "Axis of Kindness".

Third, there is a consensus in Russia that the correct response to the sanctions is double: a) an external realignment of the Russian economy away from the West and b) internal reforms which will make Russia less dependent on oil exports and on the imports of various goods and technologies.

Fourth, nobody blames Putin for the sanctions or for the resulting hardships. Everybody fully understands that Putin is hated by the West not for doing something wrong, but for doing something right.  In fact, Putin's popularity is still at an all-time high.

Fifth, there is a wide agreement that the current Russian vulnerability is the result of past structural mistakes which now must be corrected, but nobody suggests that the return of Crimea to Russia or the Russian support for Novorussia were wrong or wrongly executed.

Finally, I would note that while Russia is ready for war, there is no bellicose mood at all.  Most Russians believe that the US/NATO/EU don't have what it takes to directly attack Russia, they believe that the junta in Kiev is doomed and they believe that sending the Russian tanks to Kiev (or even Novorussia) would have been a mistake.

The above is very important because if you consider all these factors you can come to an absolutely unavoidable conclusion: western sanctions have exactly zero chance of achieving any change at all in Russian foreign policy and exactly zero chance of weakening the current regime.

In fact, if anything, these sanctions strengthen the Eurasian Sovereignists by allowing them to blame all the pain of economic reforms on the sanctions and they weaken the Atlantic Integrationists by making any overt support for, or association with, the West a huge political liability.

But the Eurocretins in Brussels don't care I suppose, as long as they feel relevant or important, even if it is only in their heads.

Sourced:Vineyard of the Saker,