Basics of Commodity Trading

Market Participants in the Commodities Market

• Market Participants: The commodities market will have three broad categories of market participants apart from brokers and the exchanges – The Hedgers and The Speculators

•    Hedgers are of two types, Producers and Consumers. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite.

•  Speculators:They are investors and traders wanting to benefit or profit from price variations; They serve as counter parties to hedgers and accept the risk offered by the hedgers in a bid to gain from favorable price changes.

•    Arbitragers: profit from price differential existing in two markets by simultaneously operating in two different markets.

Market Liquidity: 

Liquidity of any market is dependent on the volumes traded in the market.

Risk:

Due to the liquidity of the markets, the asset liquidity risk levels are well within acceptable levels.

Market Volatility:

There is increased volatility from the middle of the last year, as the market dynamics have led to commodities being recognized as a new asset class,creating higher participation.

Risk:

While volatility provides good trading opportunities, sufficient safeguards need to put in place for a proper risk return trade – off.

Commodity Trading Requirements

•    Investment:   Trading can be commenced with an amount as low as Rs 5,000 - 

    8000 depending on the commodity and contract size. All that is needed is 

    money for margins payable upfront to exchanges through brokers.                

•     Margins:Range from 5-10 per cent of the value of the traded contracts.

•     Requirements for Opening a Trading Account: Address proof,ID Proof,Photo, 

   Pan card & Latest Bank Statement.

Factors Affecting Bullion

•          Changes in Exchange Rate

•           World Political Situation

•           Supply and Demand

•           The Global Economic Situation

•           Interest rate

Factors Affecting Base metals

• Demand & Supply - Producers & End-user (Industrial, Engineering, Electrical, Construction etc.)

• Economic factor – Slowdown/ Recession

• Geographical / Political factor – Flood, Earthquake, Labor Strikes, Govt. Policies, etc. 

• Home sales,Unemployment Data,Housing Starts,Building Permits Data

Factors Affecting Crude oil

• Current supply in terms of output, especially the production quota set by OPEC.

• Economic factor – Slowdown/ Recession

• Oil demand, particularly from the U.S,China,Top Consumers

• Oil reserves, including what is available in U.S.refineries and what is stored at the Strategic Petroleum Reserves.

• EIA(Crude Oil Inventory)Status

FED Meetings, GDP, Retail Sales, Jobless Claims, Retail Sales etc. are common Data affecting all Commodities.

MCX Market at 2004(Decade Ago)	MCX Market at 2013(Now)
In January 2004, Gold was at  $ 415 levels (Per Ounce) (Rs. 6200 / 10gm)	In the first week of  January 2013, Gold was at $ 1580 levels (Per ounce) (Rs. 29800 / 10 gm ) * Record High : 1920 (Rs. 32464 / 10 gm )
In January 2004 Silver was at  $ 5.9 levels (Per Ounce ) (Rs. 7960 / 1 Kg )	In the first week of  January 2013, Silver was at  $ 32.10 (Per ounce) (Rs. 58500 / 1kg ) * Record High : $ 48.58  (Per Ounce ) (Rs. 73000 / 1 kg )
USD INR Exchange rate in the year 2007 were Rs. 40 per Dollar	USD INR Exchange rate in the year 2013  (Jan.) were Rs. 54 per Dollar
Crude Oil prices in the year 2004 were US $ 27.60 (OPEC Basket Price)MCX Price at 2005 one barrel were Rs.2200.	OPEC Crude Oil Basket price for 2013 (Jan.) stood at US $97.50 per Barrel.MCX Price were Rs.5100.
Inflation (CPI) in India in the year 2004 was 4 %	Inflation (CPI) in India in the year January 2013 was 7.5%