All that glitters is not gold

Aman Dhall & Dheeraj Tiwari  (c)The Economic Times

4 Nov, 2007

The glitter of gold may not be the same this festive season with prices of the precious metal reaching an all  time high. But amidst this volatility in the international markets, the latest option of investment in gold through futures and exchange traded funds (ETFs) is wooing a new set of investors. Here’s an insight into why you should prefer investment in futures and ETFs over gold. 

Shining Instruments

So how does the mechanism of ETFs works? For starters, these funds are traded on stock exhange much the same as a regular stock does. “ETFs are essentially passively managed funds. If you buy a Gold ETF there is no real fund management involved and your invested money is simply used to buy the underlying commodity,” explains Jayant Manglik, head, commodity business, Religare Commodities, a Ranbaxy promoter group company.

Compared to buying the physical commodity, ETFs allow you to buy ‘units’. So you can invest in small amounts. There is also no entry load (except the brokerage) and zero or minimal fund management charges because it’s a passively managed fund. “Expense ratios are typically lesser. Eventually, investors in India too will benefit once the liquidity improves and more people take to ETFs. Besides, no one is ‘pushing’ the price,” says Manglik.

Precious Metal

Demat delivery (just like in equity) does away with the requirement of keeping the commodity in physical form, thereby making security a non-issue. Compared to the sharp increases in the prices of precious metals in previous years, the cost of demat is minimal.

Experts believe that futures have several advantages over ETFs in terms of leveraged positions and small margins, which effectively allows the investor to ‘buy’ the same amount of gold at a lesser ‘price’. “Rather than being a passive investor, it is better to buy through futures that allow you to take benefits of a fall in market prices as against ETFs, which are ‘long-only’ funds,” feels Shyamal Gupta, head, institutional Business at Kotak Commodity.

Delivery Route

Industry players believe taking delivery through futures is beneficial for people who want to buy to meet social compulsions. “One big advantage is that only the best hallmarked gold bars in the country are given as delivery by the exchanges like MCX and NCDEX and so purity is guaranteed,” says Manglik. But taking demat delivery has its own disadvantages. When the price goes against your position (price falls after you have bought) then you have to give the difference (known as MTM or marked to market) immediately to the broker. So, it’s advisable for those who don’t understand the dynamics of how the commodity market works to avoid buying through futures. There have been many cases in the past where individuals lost huge amount of money because of indulging in sheer speculation.

Diversify to balance

Experts recommend that you should hedge your risk by diversifying the portfolio. “It’s always a good ploy to invest in different financial instruments. So even if you are investing in gold futures or ETFs, it is always recommended to invest some part of your portfolio in other options to mitigate the risk,” says Vikas Vasal, partner, KPMG India, a renowned global consulting firm. Experts feel that gold, as a portfolio and risk diversifier, cannot be replaced. That’s primarily one of the reasons that today also all the major investors worldwide have 3 – 15% of their portfolio in gold.

Gold Talk

An ounce of gold has reached $800 for the first time since 1980. There is a perception among the people that the prices are running up due to festive season, but that’s not true. International factors like a weak US dollar and high crude prices have been the dominant reasons for price increases in recent months. Though experts widely accept that there’s no right time for investing in gold, some feel that as long as US economy is perceived weak and therefore the US$ is weak against other currencies and crude prices are high, gold will be seen as a hedge against crude-led inflation.

“The international geo-political situation remains tense. Asian countries such as India and China have fast increasing demand, and it’s unlikely that the prices will come down in the near term. Apart from demand being more than supply, a combination of above factors will ensure firm prices in the foreseeable future,” believes Manglik.

But Gupta has other thoughts. “Based on the fundamental and technical analysis, in the long run, say over a period of two years, gold prices are likely to come down,” he says.  

FMC lowers penalty for failing to keep delivery vow

Mumbai (c) The Economic Times 
05 Oct, 2007
Commodity market regulator Forward Markets Commission (FMC) has decided to lower the penalty for failing to meet delivery obligation on futures contract.
A high penalty was distorting the trading on the last date when contracts mature. The penalty structure encouraged buyers to remain in position, hoping that delivery will not take place which would would force the seller to sell at a loss.

On the day of maturity, the spot and futures price should ideally converge but this was not happening in some of the commodities.

The penalty has been brought down to half at 2.5%, in addition to the difference between the final settlement price and the spot price prevailing on the last day of the expired contract, if the said spot price was higher than final settlement price, an NCDEX circular said.

NCDEX chief business officer Shrikant Subbarayan said the penalty was distorting the price discovery mechanism and this was pointed out by the hedgers and other participants in the market.

Navneet Damani of Anand Rathi said the buyers will not be willing to hold their position with the revised penalty and this caused liquidation of some of the long positions in the market.

Prices of chilli were impacted the most, hitting a lower circuit. The price should have dropped earlier due to good physical stocks. Other agri commodities that fell on NCDEX were chana, guar seed, pepper, turmeric, mustard while jeera and soy oil were flat and soybean closed higher. On MCX jute, potato and mentha oil slipped.

Even a rising rupee weakened sentiments on some of the commodities, feels research analyst Badruddin from Angel Commodities. "Despite soya oil and crude palm oil prices moving up in the international markets, the prices on NCDEX are subdued because of the strengthening rupee," he said.

He, however, added that soya bean is strong with a good export demand for soya meal, which is still profitable despite appreciating rupee. Out of the commodities traded on the exchanges, India imports pulses and edible oil while exports spices, guar gum, mentha oil. However, Shyamal Gupta from Kotak Commodity Services feels that agri commodities have not been impacted with the rising rupee as they are driven more by fundamentals.

The local currency has further gained to close at 39.49 a dollar against its previous close at 39.58. It’s up 11% since the beginning of the year.

Need to push policy reforms in agriculture

In the last 60 years, India had made sustained progress towards improvement in the quality of life of the people in general. However, it is disappointing to note that the progress on the social front continued to be slack inspite of increased government spending. Hence, there is a greater need to spearhead the policy reforms especially those that will have a greater impact on rural India and upliftment of farming community as they form more than 60 percent of the total workforce.

One of immediate challenges for the country include bringing reforming the agricultural sector to pull it out from the current stagnancy in production and productivity and bring it on to a high growth path and delivering its benefits to the consumers as well. While the input and input delivery side is being effectively reformed on public and public-private participation mode, states will have to speed up reforms of APMC act that would allow electronic spot markets to operate and bring in the much needed transparency and integration of today’s fragmented markets to bring in marketing efficiency. Forward Contracts Regulation Act (FCRA) bill should be passed at the earliest in Parliament to autonomy to the regulatory body (FMC), allow more products and participants on the platform thereby further strengthen the futures trading to effectively perform its twin functions of price discovery and providing a hedging platform. Allowing banks, FII’s and mutual funds is likely to bring-in the required institutional expertise in to the markets that would refine its price discovery process and spread its benefits among masses and simultaneously enable large corporate hedgers to hedge their risk with equally large counterparty with large financial muscle to bear the risk. Further, allowing FIIs to invest in commodity exchanges would help infusion of global best practices besides providing the required financial impetus to accomplish its social goals.

Immediate passing of the amendments to the Warehouse Development and Regulation Bill would more likely bring in sea change in how goods are stored, transacted and monetized in the near future much to the improvement in their marketing efficiency. In all, if the country were to grow further, and shift disguised unemployed, workforce to alternative rural employment opportunity then commodities market have the potential of providing a supply chain which can absorb large rural workforce in their neighborhood. it will also ensure that the benefits of growth shall be equitably delivered to the rural areas and those in the lower income groups, which is by empowering them and providing them with efficient choices in their lives i.e. in what they produce and in what they consume.

Published in The Financial Express 15 Aug, 2007

Celestial Lucre

Celestial Lucre by Amit Mukherjee LINK

When Manoj Jain, a Hyderabad-based bulk bullion dealer, frantically called up Anurag Tripathi, a Mumbai-based commodity analyst on a hot June morning, the question was the usual "Should I buy silver?", as the prices seemed to be showing an upward turn after a flat run. Tripathi warned him not to touch the white metal. "It's likely to show a dip in the next two days. I think you should wait for some more time," he advised. Nothing unusual in that apart from the fact that Tripathi's reasoning was based not on the usual parameters of technical price analysis, global demand and supply, and fluctuations; but on planetary calculations. His advice to Jain: "Venus is sitting in Cancer at the moment. As a result, prices will continue to slip or remain flat. It's worthwhile to wait for a more opportune moment." Yes, believe it or not, investors and traders actually sometimes suspend their faith in fundamental and technical analysis and put their money where the stars dictate. Sceptics and rationalists will frown at this logic, but Jain followed the advice and did not buy the white metal. Tripathi's is the last word for Jain, whose family has been tracking stars for trade-related advice for more than four generations. Explains Tripathi: "Silver is usually under the influence of Venus and has a moon sign of Cancer. Since Venus is a soft and kind planet, when it passes through Cancer, which is the zodiac of silver, it has a soothing effect on the metal. The impact of a tender planet on a metal usually translates into a fall in its price." Tripathi and others of his ilk have a sizeable following among commodity traders. "If Venus cruises through a harsh zodiac like Leo, there will be a bullish effect on the metal and prices will shoot up in the short term. Also, if Venus along with Sun passes through Cancer, it will have the same effect," says Tripathi, who predicts commodity fluctuations on an hourly basis on celestial combinations. Jain says that the planets have seldom let him down. "Predictions based on planetary movements have proved accurate about 80 per cent of the time," he says. And his is not a one-off phenomenon. Says Shyamal Gupta, Head (Institutional Business), Kotak Commodities: "Though most people will not admit it, a large number of market players do refer to astrological calculations and quietly rely on them." Gupta, who was earlier with the Multi Commodity Exchange (MCX) as Senior VP (Product Knowledge Mangement and Institutional Business), asserts his faith in planets saying: "Often, such reports are contrary to mainstream market trends based on technical projections. There have been instances when planetary calculations have helped investors make a fortune when the markets appeared to be in a bear grip." Some institutions also seem to have jumped onto this celestial bandwagon, though not overtly. Tripathi, who is an analyst with the National Spot Exchange, bagged the post primarily on the basis of his ability to gauge the effects of Saturn, Sun, Venus and other stars on commodities. Here's how it works Tripathi calls his methodology "astrological projection theory", which, he claims, enables him to read the future direction of commodity prices. "The market trend indications under this method are based on a series of mathematical calculations, which are integrated with other market principles of analysis in a structured format," he explains. The planetary positions are calculated meticulously and are matched with historical trends. But sceptics also abound. Atul Shah, Head (Commodities), Emkay Commotrade, says most astrological predictions are inaccurate. "It's pure chance when predictions work in someone's favour." Shah analyses commodities based on factors like demand and supply in the US markets, us Federal rates, the manufacturing index and unemployment data, among others, though sometimes, he does rely on nature for his predictions. "For commodities like petro-products, predictions are made after taking into account occurrence of calamities such as hurricanes, which affect production at refineries and transportation." Having said that, Shah, however, qualifies his apparent lack of faith, saying: "Astrological predictions can be scientific in nature but I doubt if today's astrologers are good enough to decipher celestial messages." Ashok Goel, a stocks and commodities advisor and owner of Delhi-based Goel Capital, also hedges his bets. "The immediate movements projected by these astrologers are good, but long positioning moves based on these predictions often fail. Sometimes when the two projections-astrological and technical-show some sort of congruence, I have relied on the astro-projections for a kill." But he is quick to add: "You cannot completely rely on them." Semi-sceptics like Shah and Goel get a riposte from the serene ghats of the Ganga in Benaras. Chanrama Pandey, Head (Astrology Department), Benaras Hindu University, asserts: "Astrology is a vast science that involves physics, mathematics and biochemistry. It's true that very few people have in-depth knowledge of astrology, but that does not make the subject a hoax." Explaining the influence of planets with the theory of resonance, Pandey says: "There are certain basic elements which are present in all commodities, substances, planets and life forms in the universe. All the objects have particular frequencies that cause them to resonate under the magnetic flux and radiation of various planets depending on the planets' positions." This has a beneficial or a malefic effect on all commodities and life forms on earth. "Astrology has always been a guiding force for the Rs 15,000-crore a day commodities market. The panchangs (almanacs) published by a host of small publishing houses have been guiding businesses in India for years," says Gupta. The annual turnover of the panchang market is about Rs 5 crore, according to market players. "Our calendars have been in demand since the 60s and today, across India, we sell almost 10 lakh copies of our calendar, which comes out twice a year," says Anand Agarwal, owner of the Benaras-based publishing group Savitri Thakur, which comes out with the famous Thakur Prasad Panchang and Chinta Haran Jantri. "The calendars are not highly priced but the volumes are reasonably good," says Agarwal. Rationalists, however, dismiss this phenomenon as so much more mumbo jumbo. Says Prabir Ghosh, General Secretary, Science and Rationalists' Association of India: "Astrology and the astrologers are a complete hoax. How can stars alter anything? In the greater interest of society, this profession should be declared illegal." But that is unlikely to shake the deep-rooted belief in the powers of the stars which has been ingrained in the psyche of many Indians over several millennia. By the looks of it, the Indian commodities market will continue to shimmer under the guidance of the heavens. Published in Business Today

https://docs.google.com/fileview?id=0B4ixl5sNnqklYjA1MWJiMTktOTQxMi00ZTc2LTg2MWMtODVjZmE3MjQ0YmNk&hl=en

Weather derivatives could be a reality

Mumbai (C) The Financial Express

It’s that time of year to take out your pani patras and wager on the rain gods. And with commodity exchanges and traders betting on the weather, it is expected that a full-fledged weather derivative market could develop in India in the next few years. Indeed, commodity exchanges MCX and NCDEX have even asked outside agencies to look into formulating a mature, rain-based index.

In 2005-06, NCDEX launched the first rain index on the rationale that it could help fund managers hedge against the weather. The global weather derivative market is estimated at $12 billion, according to Pricewaterhouse Coopers.

While there is no trading on the weather in India yet, the rain index helps organisations understand monsoon trends and patterns. “As far as weather derivatives are concerned, these are at a nascent stage in India,” says Amar Singh, head, Angel Broking.

However, Shyamal Gupta, head of institutional business, Kotak Commodity Services Ltd, feels that a good rain index in India is still five to ten years away. “For a single, country-wide index, a lot of parameters would have to be taken into account. The weather department will also be have to be strategically involved,” added Gupta.

The world’s first exchange-traded weather derivative began on September 22, 1999, at the Chicago Mercantile Exchange

Coffee Launch on MCX Futures Platform

MCX Coffee Futures Launch 29 Jan 2007,
 (R to L) Lamon Rutten (JMD, MCX), GVK Rau IAS  (Chairman Coffee Board), Joseph Massey (DMD, MCX) and  Shyamal Gupta (Senior Vice President  MCX) 

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