Points to ponder in commodities

INVESTING

Commodity trading, which was until recently a not-so-familiar concept in India, is catching on among investors.

So, if you are an equity investor who has opened your bank account to trade in commodities because everybody's doing so, you're reading this at just the right time.

Never mind, if you don't know how soyabeans look like. Dealers and traders indicate that the secret lies in blindly following a three-point strategy.

First, fundamentals. Commodities are highly driven by demand and supply factors, and inventory when it comes to perishable commodities such as agricultural products and greatly consumed products such as crude oil.

The second important factor to be looked at are the technicals or charts, which give an indication on price movements.

Due to their high correlation with international prices, commodity prices generally track data releases in the US such as the monthly economic data, the weekly jobs data, and stuff such as interest rate hike news, stock market trends etc.

For instance, locally, gold prices are traditionally expected to come down during the Diwali season. However, there could be extraneous factors that could play an important role in it not doing so.

Last week, when gold reached a 16-year high of $434 on the New York Mercantile Exchange's Comex, the jobs data in the US for the week was reported to be excellent at over three and a half lakh additions.

This should have led the prices to crash, but the prices, however, rose further owing to a weak dollar and geo-political tensions.

Therefore, instead of profit taking, many new players were seen buying at higher levels.

Analysts predict that prices of gold are likely to remain bullish in the long run and even expect the prices to touch $450 levels.

Finally, there's seasonality. More often than not, commodities follow a seasonal cycle that has specific influence on the fundamental factors.

For instance, during harvest time, if the crop expectation is good there is a price slump. Or, it could be the other way around if the crop expectation is poor.

Besides this, there are a few other things that could be kept in mind as well.

Currently, the national-level electronic exchanges, namely the National Commodities and Derivatives Exchange (NCDEX), the Multi Commodity Exchange (MCX) and the National Multi Commodity Exchange (NMCE) offer a host of both industrial and agri-commodities, have margining systems which will indicate unusual levels of activity in the exchange on the specific commodities.

When the margins are high, it automatically indicates that there is unusual volatility in the trading which should keep you away from trading in the contract at the time.

Also, in case you imagined yourself to be sitting with sacks of wheat and rice when your contract expires, don't fret. If you intend not to take or give delivery of the commodity, all you have to do is make your intention clear at the beginning of the contract period.

They say commodities are risky. But it's not half as risky as the equity markets if you have the appetite. Therefore, if you are just stepping in, you might prefer to choose directional trading and go the traditional way rather than dabbling in day trading!