Taking stock of commodity trading

Better liquidity makes non-agri contracts less risky than agri commodity contracts

The recent rout in commodity prices has sent global markets into a tizzy. But the ongoing volatility could be a friend of a commodity trader. For traders in India, there are two categories of commodities available for trading.

The first is agri-commodities, such as cotton, cardamom, soybean and castor seed that are traded on the National Commodity and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).

The second is non-agri commodities, such as base metals, precious metals and energy commodities that are more actively traded on the MCX. Now, unless you know what really moves agri-commodity prices, the risk of burning your fingers is quite high. Also, the market depth is low.

Nithin Kamath, founder and CEO of discount brokerage firm Zerodha, says “agri commodities are riskier to trade and it is better to avoid trading them unless you know the factors that drive their prices”.

The risk is lesser with non-agri commodities.

There is better liquidity and the prices move in sync with global rates; so, the scope for market manipulation is low. Here’s a quick reckoner for trading in non-agri commodities on the MCX.

Trading features

Gold, silver, aluminium, nickel, lead, zinc, copper, crude oil and natural gas can be traded on the MCX. You can take bets on the price movements of these commodities by buying or selling futures contracts, the prices of which move in sync with the global prices of the commodities and the local currency movements.

The futures contracts on the commodities are available for trading on the MCX between 10 am to 11:30/11:55 pm on weekdays, much longer than the trading window for equity futures contracts.

The sizes of these contracts are generally huge, for instance, five tonnes of aluminium and 100 barrels of crude oil — that’s to suit the requirements of those who physically deal in these commodities.

But traders who seek smaller bets can make use of the mini contracts that come with smaller lot sizes of, say, one tonne of aluminium and 10 barrels of crude oil. So, a 10 barrel crude oil mini contract will currently have a notional value of about ₹21,500 against ₹2,15,000 for a normal 100 barrel contract.

Also, you don’t have to put up the ₹21,500 upfront. Futures contracts allow you to take bets by placing margin money — a portion of the notional value of the contracts.

For instance, by putting up ₹1,075 (5 per cent of ₹21,500), you can buy or sell one lot of the crude oil mini contract.

But note that you have to keep adequate money in your trading account to make up for the day-to-day price fluctuations in the contract until you exit your position — this is called mark-to-market provisioning.

So, if the contract price moves against your bet, your account will be debited and if it moves in your favour, you will get money in your kitty.

From a time perspective, you can trade either in short-term contracts or those with longer tenures.

Liquidity and price discovery may not be good in long-term contracts; so, it may be better to trade in those with shorter tenures.

Settlement modes

The trade position, whether buy or sell, automatically gets settled on the expiry date of the contract or it can be squared-off and closed even before by taking an opposite position.

As a seller, if you intend to settle on expiry instead of squaring-off before, take note of the dates and timeline by when you need to inform the exchange about specific settlement modes — whether physical or in cash.

Gold and silver are the only commodities that have to be compulsorily settled in physical form if the seller holds on till contract expiry.

In other commodity contracts, intimation to the exchange on or before the cut-off date will enable a seller to settle in cash on the contract expiry date.

What to factor in

Whether you profit or lose on a trade, the broker, exchange and the government must be paid their due.

So, factor in costs such as brokerage, commodity transaction tax (CTT), service tax and SEBI charges that add to the cost of your bet.

If you think silver price will go up over the next month, you could buy a silver mini contract with a lot size of 5 kg currently trading at around ₹34,000 per kg. The margin money will be ₹8,500 and you also have to account for brokerage and other charges.

If the contract moves up to ₹35,500 and you close the trade by taking a reverse position, that is selling the contract, you earn a profit of ₹7,500 (₹1,500 per kg) less brokerage and other charges, which will be credited to your account.

But if the contract falls to ₹32,500, you will have to pay up ₹7,500 plus brokerage and other charges.

Source: thehindubusinessline

Lack of Asian buyers may keep a lid on gold price

The surge in the gold price last week has not resulted in increased buying of the precious metal by the world's two biggest gold clients: China and India.

According to the Times of India, buyers have so far shown little interest in hitching their wagons to the gold rally.

On Thursday, the price of gold climbed nearly $70 an ounce as turmoil on world financial markets and global economic fears sparked a return to safe-haven buying.

Futures contracts in New York with April delivery dates jumped 5.8% to a high of $1,263.90 an ounce in massive volumes of nearly three times usual volumes. That moved gold into a bull market with gains topping 20% from the near six-year low struck mid-December. However by Friday, some of the rally had diminished, with gold futures slipping $7.10 to $1.240.60 an ounce.

While Australia's Perth Mint had one investor order a million dollars worth of gold, it noted most of the interest is from Western clients. That is perhaps surprising given that Indian and Chinese buyers often swoop in to buy gold bars, coins and jewelry if they are confident of a sustained rally. On the contrary, despite offering a record discount of $40 to the global benchmark price, retail demand has "almost vanished" Times of India quotes one Mumbai-based jeweller. Discounts were also being offered in Japan, Hong Kong and Singapore.

Between them, China and India account for around 45 percent of world gold demand.

Meanwhile Dennis Gartman of The Gartman Letter was quoted on CNBC on Friday as saying that it might be a good idea to wait on gold.

Gartman told CNBC's Squawk Box that gold is likely to correct before the Presidents' Day holiday on Monday, on the back of rising U.S. equities, and could slide to between $1,215 and $1,225, at which point he might buy in.

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Support $ 1183 or $ 1191.70 last top in October 2015. Next Target $ 1308. 

Why Most Investors Hate Gold

The move in gold, up 17% year to date, is important, according to ConvergEx's Nick Colas...

We’ll be blunt: most financial asset investors really hate gold.

Anything – even leaving money in the bank – is better than owning gold since at least society has access to your capital through the banking system.  Once you buy physical gold, no one has access to that sliver of your portfolio.

Of course, that’s actually a feature for the owner since physical gold is no one else’s liability. 

So the notable rally in gold is essentially a protest vote against the global financial system, the equivalent of taking your ball and going home.

This only happens when investors think central banks have lost their way, and that’s not good news.  Think of gold as a super-duty dive watch.  It can go places humans can’t actually even dive.  The watch will outlive the person wearing it.  Kind of cool, but you don’t necessarily want to test it yourself.

Finally, Colas adds...There are three reliable signs of a market bottom, where things get so bad it is safe to step in.

First, when the S&P 500 drops 5% or more in one day.

Second, when the CBOE VIX Index tops 40.

And third, when everything sells off for a few days and correlations for all equities approaches one.

None of these events have yet occurred.

And so we wait...

Gold Technically To Move Higher, $1550 A "Possibility" - BoA Merrill Lynch

As investors continue to flock to gold, pushing prices to highs last seen one year ago, one major U.S. bank says it may also be jumping on the bandwagon.

Technical strategist for Bank of America Merrill Lynch, Paul Ciana, told Kitco News that the bank went long gold at the $1,089 level as the metal formed a “rounded bottom pattern” earlier in the year.

Now that the yellow metal has breached the $1,201 level, things are starting to look even more positive, he added.

Thursday, prices rallied to levels last seen 12-months ago, with gold pushing back above $1,260 an ounce. Gold futures are up over 18% on the year, with April Comex gold settling the day up $53.20 at $1,247.80 an ounce.

“Given the fact that price action has been able to break up through resistance of $1,201, we’ve extrapolated the 200-week average to estimate an outside target of $1,315,” he said. “Our measured move projection based on the height of the channel, estimates a second target of $1,375,” he added

Ciana noted that gold may even have the “possibility” to move over $100 from there.

“We’re not making this a target but looking back at the trend over the last 5 years, there’s a large gap in the price distribution of which sometimes these gaps get filled,” he explained. “That may lead gold prices to $1,550.”

Looking at support levels, Ciana said that the under-$1,000 price tag that pundits were calling for earlier in the year ago may not be as probable given the recent upswing in gold prices.  

“Sub-$1,000 was definitely a possibility 2-3 months ago, but I do not really see that as likely at this point,” he said.

By Sarah Benali of Kitco News

It's Not Just China And Oil Anymore: Here Are The Two New Concerns Weighing On Risk

While the following summary of key recent headlines suggests a broad array of issues leading to the worst start of the year since 2008...

... in broad terms, the biggest worries challenging that bull case in January were twofold: China and commodities, mostly oil. However, over the past week, two new big concerns appear to have emerged. Here, ironically, is Deutsche Bank explaining what these are (for those confused, "tightening in financial conditions in European financial credit" is a euphemism for plunging DB stock among others):

The year continues to be bruising for risk assets and recent attempts at stabilisation have been unsuccessful. After a mild rebound, equities and US credit spreads are again close to their year’s worst levels.

In addition to the initial concerns about China and energy, two new issues further weigh on risk sentiment: the slowdown in US growth momentum and the tightening of financial conditions especially in European financial credit.

Macro data in the US have been weaker than expected and have raised questions about the sustainability of the recovery. Consumer spending and the services sector, which had been the drivers of growth, have decelerated. Fundamentals there still look sound, but weakness may persist and we have revised our below consensus growth forecasts further down. The Fed turned more dovish in response to the slower momentum and market volatility, and we no longer expect a rate rise in March. Indeed, at this stage it is difficult to see the Fed hiking more than once this year.

The Fed was not alone in this dovish turn. The Bank of Japan surprised markets by cutting rates into negative territory, and we actually expect a further cut later this year. As for the ECB, more easing should be forthcoming in March. A deposit rate cut seemed like the best course of action in response to purely external risks, but if the tightening of financial conditions does not subside an increase in the size of the QE purchase programme may be necessary.

Our macro outlook for 2016 is broadly unchanged so far, uninspiring but not a disaster – but downside risks have risen both in the US and in Europe. Meanwhile, the absence of new news has moved attention away from China, but the underlying problem remains unresolved. As for oil, volatility is becoming less relevant for macro and markets.

Despite this monetary policy support, until US growth, European financial conditions, China and oil concerns are put aside, markets will remain volatile and a sustained change in risk appetite is difficult. Fundamentally, we see 15-20% upside to equities, US credit spreads fairly priced and still believe in the stronger dollar story – but risks remain for all these views.Expectations for a drift higher in rates have not materialised, and dovish central banks and lingering macro concerns will continue to delay this normalisation.

And here is the matrix breaking down all the recent conditions weighing on risk. We wish we could be as optimistic as DB that monetary support from central banks which are now running on fumes in terms of credibility, and that oil, which continues to gyrate with grotesque daily volatility, are "supportive."

In fact, we are confused that DB is optimistic on central bank support: after all it was, drumroll, Deutsche Bank, which over the weekend warned against any more "easing" from central banks whose NIRP is now weighing on the German bank's profitability, something the market has clearly realized judging by the price of its public securities.

Gold tops $1200 for the first time since June 2015...

Since The Fed policy-error'd in December, gold is now up 22% over US equities...

Gold tops $1200 for the first time since June 2015...

Lead soars as pressures ease

 

A sharp and continuous rally in lead prices, for the past three weeks, has wiped out the losses the metal made in the first two weeks of January. The spot price on the London Metal Exchange (LME) has surged 10 per cent from $1,600 to $1,771 per tonne.

On the domestic front, the lead futures contract traded on the Multi Commodity Exchange (MCX), which moves in tandem with the LME spot price, also rose 10 per cent over the same three-week period and closed on a stronger note at ₹120 per kg last week.

Two major factors have triggered the recent rally in lead. First is the recent weakness in the dollar which, in turn, has added sheen to assets like commodities and non-dollar currencies, in the last few weeks.

Two, recent data releases showing an increase in lead imports by China have also supported price rise for the metal. The country’s lead imports have increased about 45 per cent to 297 tonnes in December from the previous month according to data from Bloomberg.

Reports also suggest that an increase in the demand for batteries due to more battery failures this winter season has also helped prop up lead prices. Though the recent rally in lead can also be attributed to short-covering, the charts suggest that the recent uptrend can possibly extend.

Medium-term view

Barring the brief fall below $1,600 to hit a six-year low of $1,554 in late November, LME spot lead has been range-bound between $1,600 and $1,800. The metal’s price rose to a high of $1,818 on Thursday last week, but fell back to close below $1,800 — the upper end of the range at $1,771. Price action in the coming weeks will need a close watch as it would decide whether the metal will stay in the $1,600-1,800 range or break above $1,800 to rise further.

A strong break and a decisive weekly close above $1,800 can increase bullish momentum and take it higher to $1,850 immediately. A further move above $1,850 can see the rally extending towards the next target of $1,900.

The lack of follow-through selling below $1,600 is a positive. Also, the metal has been moving inside a channel since October 2012. Since August 2015, this channel support in between $1,650 and $1,600 has been consistently limiting the downside and is providing a strong support. This is why a decisive weekly close above $1,800 will not just boost the bullish momentum, but also signal that the channel is intact. This increases the possibility of the LME spot testing $2,000 in the coming months.

On the domestic front, the recent rally in the MCX-lead futures contract is signalling a break-out of the range-bound movement that has been in place for more than six months since June 2015.

The contract is hovering near the 200 and 100-week moving averages, which are poised between ₹120 and ₹121. A strong rise above ₹121 can take the contract higher to test the next important resistance at ₹130 in the coming weeks. A further break above ₹130 can take the contract higher to ₹140. The contract has formed a strong base in between ₹110 and ₹105. The outlook will turn bearish only on a strong fall below ₹105. Such a fall will increase the danger of the contract falling to ₹100 and ₹98 thereafter.

Short-term view

The short-term trend for lead is higher. The MCX lead futures contract has broken above an important resistance at ₹117. Immediate support is at ₹119 and then a significant support is at ₹117. As long as it stays above these supports, there is no immediate danger of a sharp fall in the contract.

Intermediate dips to these supports may see new buyers coming into the market. At the moment, the downside is expected to be limited to ₹117.

A rise to test the next resistance at ₹127 looks likely in the coming days. The outlook will turn negative for a fall to ₹115 and ₹112 only if the contract declines below ₹117.

If the contract manages to surpass the immediate hurdle at ₹127, it can rise further to ₹130.

Increase in Chinese imports and a weak dollar have helped the metal reverse