The commodity markets in India are growing by leaps and bounds and many traders have spotted the opportunity and jumped in.
Jayant Manglik
Now that I have your attention with that headline, let me get straight down to business and outline here some simple facts and strategies, which would take us closer to our goal of making money in commodity markets.
Commodity markets are generally assumed to be exotic and while many people are familiar with MCX and NCDEX as exchanges, not many have tried their hand at trading on these. Broadly speaking, there are four main segments - agri, base metals, bullion and energy. Of these, bullion, viz. gold and silver, account for about 70% of the volumes - a clear reflection of our love for these commodities. Bullion trading is liquid with sufficient depth and is value-transparent. A key reason which drives these volumes in bullion is also the international price linkage i.e. bullion prices in India are dictated by international markets where the dominant volumes are traded in gold and silver. In fact, this is the first and one of the simplest strategies utilized by traders. As soon as international markets (read NYMEX/COMEX) open, serious traders get their prices on their screen and quickly make trades in MCX or NCDEX locally based on international price movement.
Since gold is quoted in US$ per troy ounce (The troy ounce remains a traditional fixture of the gold trade and the most important basis for expressing quotations on a majority of the leading gold markets), the effect per 10 grams in rupees translates to about Rs 14 depending on the prevailing exchange and duty structure. Using this as a base, traders follow international markets and in the process make money, besides making our markets more efficient by pushing up prices closer to the price leaders. Bullion also frequently has direct correlation with the price of crude and inverse correlation with the US$ and therefore these two commodities are closely tracked by traders. Spread trading (trading on the amount of price difference between two contracts, e.g., between gold with June expiry and gold with August expiry) is also a popular form of trading and is considered to be a product with lesser risk-reward. Your broker remains the best person to educate you about strategies in trading.
The second group of popular commodities traded are base metals, which mainly consist of copper, zinc, aluminum and nickel. In terms of volumes, copper and zinc are the best to trade in. But, since it is a leveraged market (e.g. zinc prices are displayed on screen in Rs per kilo and the minimum lot size is 5MT i.e. 5,000 kilos), a movement of just Re 1 in Zinc on screen translates to a loss/profit of Rs 5,000 if you hold just one lot. Similarly, a Re 1 movement on screen in copper means a change of Rs 1,000 per lot. It is precisely this kind of movement which attracts smart traders who have a nose for market movements and follow news and charts real time to get good returns. Copper prices follow NYMEX and the rest are usually led by the London Metal Exchange (LME) and to a much lesser extent by the relatively smaller Japanese (TOCOM) and Chinese (Shanghai) exchanges. The movements also affect the prices of equity of companies like Hindustan Zinc, Sterlite, Hindalco and Nalco.
Insofar as energy commodities are concerned, currently only crude oil and natural gas are listed, though they are fairly popular and volumes are reasonable. Investors are well aware of crude prices nowadays since this is news that has significant impact on equity markets, too, and is flashed on all business TV channels. Spikes in crude prices dampen enthusiasm on Dalal street and a sharp dip has the opposite effect. In many ways, especially on days of sharp price movement, the opportunities of making money tracking crude are probably better than taking a bet solely on the stock markets.
Domestic to India and with seasonal volumes are the agri-commodities. Trading prices in each are affected by the timing of sowing, harvesting and delivery to local mandis. Because of relatively lower depth and short trading history, it can be said that technicals (research using historical prices and volumes with a view to predict future movement) are not effective so far and therefore, many traders keep fundamentals in mind as well. But, if your broker has enough offices in ‘mandi’ locations, he can gather the required information real-time. Also, one of the best products to ask of your broker is the spot-futures arbitrage. In this, your broker will buy a commodity from the mandi (e.g. chana, jeera etc.) and sell it immediately on the exchange. The difference in the price accrues to you, the client, and the returns after expenses, though difficult to predict (and forbidden to be projected by the regulator), could be termed as attractive.
In conclusion, the commodity markets in India are growing by leaps and bounds and many traders have spotted the opportunity and jumped in. Commodities are not really exotic and are the same as equity as far as the trading systems are concerned - in fact most brokers have the exact same front-end screen for equity and commodities. The rules of trading in leveraged markets are simple - keep strict stop-losses; while in profit, scale your stop-loss upwards; do not over-leverage; and book profits intermittently, just as you should enter in stages at different levels, choose your broker carefully and buy low, sell high! You do that and the headline will not always be a tough act to follow.
The author is head - commodities at Religare and can be reached at Jayant.manglik@religare.in
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