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Vandana Bharti's  Instablog

I have four years experience in commodities, especially in metals and energy. I manage the portfolio of commodity investors. Study the macro and micro econmic factors and have the experience of forex market too. I give my views on CNBC, Zee Business and India News on a regular basis. I also... More
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SMC
  • Gold May Add More Glitter to Your Portfolio
    Now a days, yellow metal gold has become the most popular choice for investors due to its recent spellbound upside movements. Fall in dollar value against major currencies along with ambiguity over further upside in equity market is convincing investors to park their money as a safe haven buying. Regarding the price movements in 2009, with the favorable fundamental situations, it has been trading north ward so far. We know that a cocktail of factors viz., injection of stimulus packages, excessive printing of paper money, widening trade deficit, rising debt, gold mine supply is at historic low, buying by central banks, historic interest rate cuts, deteriorating US economy, shrinking trade activities etc., are likely to keep gold in uptrend going forward.
                                                                                 However, if we talk about the latest movements in gold, it is more seasonal. Seasonally, September is the best month for investors to invest into it. It could be concluded as over the four decades, it has been giving best return on month over month appreciation.  Furthermore the chart below also depicts the same. Even festive demand gives underlying support to gold prices and fourth quarter being festive quarter bullishness in prices continue. Physical buying begins in India due to festive and wedding demand and it continues till China‘s New Year celebration. Western economies participate in buying during Christmas. It has “low season” too which runs from March to July. This pattern occurs even in secular bull markets.
    Average Monthly Movements Of Gold On 22 Year Chart In COMEX
    (Unit $ Per Troy Ounce)

    Source: SMC
    However, this September could be a challenging September due to economic slowdown but any downside in gold prices will further stimulate buying as this time rally is likely to be supported by investment demand as well. Even, investment in gold mining stocks is lucrative for investors right now. After soft months of June and July, gold mining stocks start to bounce in August and September. Apart from seasonal demand there is one major factor, which gives boost to gold prices. We have witnessed two major shifts in gold in past few years, which is showing the change of priority of uses of gold.
     
    Falling jewelry demand and rising investment demand…
    Rising gold prices has hit the gold demand which is majorly used in jewelry. In India in the first quarter, gold import declined by more than 80%, due to decline in demand for physical gold. Despite this massive fall in jewelry demand, gold is trading in an upper range and this rise could be attributed to investment demand of gold, which in 2008 alone saw the rise of around 64%. Gold coin shortages, surge in gold ETF’s, and then rising premium is depicting the investment demand of gold. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year (more than it sold in all of 2007 and at prices 40% lower). This investment demand has improved further in 2009 with the existing historical turmoil in the market. Investors prefer to diversify their 5-10% of their portfolio into gold in such type of economic crisis.
    Central banks increasing their gold reserve…
    Even, central banks and many governments bought gold or they are in the process of buying gold for “flight to safety” due to the fragile movements in world reserve currency US dollar. ECB (European Central Bank) has slowed its gold sales from last two-three years. According to world gold council data in current gold year which begins in September, 2008 ECB sold only 140 tonnes of gold out of 500 tonnes. Recently, it has announced that now the gold sales quota is only 400 tonnes as compared to 500 tonnes earlier. It also shows that demand for gold is everywhere. Russia increased its limit from 5% to 10%. China has planned to increase its gold reserves from 500 tonnes to 4500 tonnes. It has already doubled its gold reserve from 500 tonnes to about 1100 tonnes now targeting more. The Russian Central Bank, Middle-Eastern and the People’s Bank of China have become buyers of gold along with other nations. Central banks still hold 29,000 tonnes of gold in their currency reserves.
    The way world major economies have injected stimulus packages to get out of the wood has rekindled the concern of inflation. This would again send investors into precious metals. Historically, it is evident that when US debt rises, it pushes up gold prices. For example: From 1970 to 1972; U.S. government's debt increased by $50 billion and the price of gold went up 80% during the same period. Currently, US debt is at all-time high, which is expected that it will support gold to achieve a new high in 2009. According to World Gold Council reports, India’s bank deposits saw 22 percent year-over-year growth in the second quarter of 2009, hence even a small spending of that saving over gold can spur physical buying in India.
    Gold may touch fresh life time high in 2009 as the capital inflow is increasing day by day on the other hand dollar is losing its value gradually. At present, it is prudent to allocate at least 5-10% of the portfolio in gold via, gold ETFs, gold futures or gold coins or bars.

    Tags: GOLD, ETF
    Sep 17 01:04 am | Link | Comment!
  • Natural Gas “The Fuel of 21st Century”

     

    Natural gas which is known as fuel of 21st century has caught attention across the board in India in recent days with its big see saw movements.  From the high of $13.69 per mmbtu in 2008 it saw a razor sharp fall to the level of $3.11 per mmbtu with the mayhem in financial market. At present, it is on bumpy ride. Back at home, it saw a decline of more than 71%, and is now struggling to bottom out. But the million dollar question is whether it has hit the bottom or yet to hit.
    Going forward let me talk about its uses. Natural gas, being a nonrenewable fossil fuel, it is a hot favorite of every human being. It ranks number three in energy consumption
    after petroleum because of its uses in power generation, domestic use, fertilizer, aviation and other many more. Moreover, it is commonly used in the production of steel and other metals and in many industrial areas from chemical production to fertilizer apart from other uses. With its greater efficiency and cost effectiveness, it is the most preferred fuel for cooking, transport and lighting. But on the flip side it faces transportation and storage problems because of its low density.
    On the demand side, it has massively increased in last two decades. 15 nations account for 84% of the worldwide production and its price varies greatly depending on location and type of consumer. Closer home, its demand has improved in last decade. With this mayhem in the financial market across the board, we have seen a drastic fall in the demand of this item and consequently lead to a fall in natural gas prices. However, world economy has begun to give a glimmer of hope with some improvement in economic data’s and revival in stock market, which is a leading indicator of economy as well. Furthermore, with the expected growth in the use for natural gas for vehicles its prices are likely to increase in future. On supply side, every round of fall in the prices has been resulting in a further decline in natural gas rigs in operation, which may support prices rise at the time when demand will start improving on higher pace.
     
    At present, inventory levels are at record level and two things can be the chief driving variable for natural gas. Firstly, the industrial demand, which is not so strong and U.S. Department of Energy has forecasted that industrial consumption of natural gas will decline by 8% this year. Total consumption of natural gas is expected to fall by 2% in 2009 however; consumption will increase in 2010 with expected economic recovery. Secondly, weather; keeping in mind that natural gas-fired generators are very expensive to operate and it is widely used in overseas. Hence, any summer demand could give significant impact on the prices. If west and east coasts experience a mild summer it will limit the demand and vice a versa. Hurricane season has the high impact on the price movements of natural gas as considerable portion of natural gas production is either done in the Gulf of Mexico or stored there. Hence any hurricane strike in Louisiana, Eastern Texas or to the Gulf platforms could put an immediate lift in natural gas prices. Furthermore, it is used mainly for heating in the Northern states during the cold winter months in US, may support prices during that period. Seasonal demand is the highest in this period. If we have a look on average monthly price movements, below chart is also showing that it trades in a higher range during winters. It’s too early to say that it has hit the bottom but if an investor goes for long term then the low of August will be good entry point for buying for long term prospect.
    Average Monthly Prices Movement of Natural Gas (From 1990-2008) ($ per mmbtu)
     
    Source: SMC
     
    Source: SMC
    Crude prices are the strongest indicator of energy complex. If we talk about the crude vs. natural gas ratio, during the late 1990s and early 2000s, it was close to 6:1. But, it is around 18:1 at present. Hence the question arises, whether natural gas decoupled with crude oil, which has a strong positive correlation in general. The answer is yes, for the time being it has decoupled. However, we can expect that the ratio should normalize and at the end of this year, it should at least come to the level of 12:1. Consequently, we can say that one should go for buy in natural gas and sell in crude oil. Time factor for this strategy will be crucial and according to the seasonal demand, third quarter or August can be the best month to adopt this strategy.
     
     

     

    Jul 22 02:23 am | Link | Comment!
  • Agro Commodities "The Star Performer Of The Future"

    Highlights of the article…

    • Appreciation in currencies will increase consumption of agro commodities.
    • Demand for agri commodities is relatively immune to the recession.
    • Improving income in China and India amid supply shortages is major driving force for this price hike.
    • Supply dominance vs. demand dominance.
    • In the past 20 years, not even a single decline lasted more than 16 months from peak to trough.
    • Demand for agricultural commodities is inelastic.
    • Agro commodities are cyclical in nature.
    • By 2020, there will be three billion more people in the world.

    Few people know that world has galloped more food than it produced in last five years. It was not happened before in the recorded history. Despite the mayhem in the world economy, which is considered as the most severe recession after 1932, commodities have given comparatively better performance than other asset classes due to their massive demand. We can’t say that demand for agricultural commodities is completely immune to the recession but it is relatively immune to the recession as compared to metals and energy and other things. With the decline of around 20% to 40% in several commodities viz., soyabean, spices, sugar etc. in world production, these commodities prices are significantly moving higher. However, current rise in the prices will encourage farmers to produce more for next season. It is evident from the fact seen in 2008 in case of wheat and rice. Year 2008 will be remembered for the sky scrapping prices of wheat and rice, which encouraged framers to plant more for the year 2009.
    Buying is still intact in soyabean, sugar, cotton and spices with future demand exceeding supply for the current season. The major driving force for this demand is improving consumer income in China and India in the middle of a shortage of productive farmland. Lack of credit facilities in US and other countries due to ongoing credit crisis, farmers were compelled to produce less in 2008, which resulted in supply squeeze world wide. If we talk about demand, it is more or less same in most of the countries. No doubt economic growth of China has become slow for the same reason but despite this, its economy should expand by more than $200 billion per year for some time. Hence, we can expect a continued demand for food from China.  Below chart is showing the return of agro commodities in 2009 despite the mayhem in the financial market. It shows that commodities are relatively inelastic as compared to other things.


    Return of agro commodities from 01.01.09 - 30.04.09 (In %age)
        

    Factors should be taken under consideration…T... are certain important factors 0which should be taken into consideration to know the demand, supply and the price outlook of commodities.  Since this is a historical economic crisis time, the movements in financial market are abnormal. Hence to know the performance of commodities during and after recession is very crucial at this juncture.

    Global scenario…Some commodities, which have seen supply glut in 2009 may see decline in the production in 2010 and vice a versa while consumption will remain on the higher side which would bring bull rally in these commodities. Production of grains in 2010 is expected to be 1.727 billion tonnes, which is around 3% lower than world grain production of 1.784 billion tonnes in 2008-09, according to the International Grains Council. Some reductions in plantings on the back of the economic downturn were also responsible for this decline. Carryover stocks will remain significantly higher than 2006-07 or 2007-08. Sky scraping prices of sugar, which was on three year high, may see slower upside in 2010 as production is expected to increase to 160 which is 156.6 million tonnes in 2008-09.
    On the contrary, some commodities, which are considered as money-spinning commodities, may see higher production in 2010, as farmers have encouraged producing more with higher return in 2009.  Global oilseed production for 2009-10 is projected at a record 422.1 million metric tonnes, up 25.9 million from 2008-09, according to latest data from USDA. Global soyabean production is projected to increase 14% to 241.7 million metric tonnes. However, this expected increase in production is unlikely to cool down the edible oil seeds and oil prices, as the total expected increase is only 4% due to lower beginning stocks. Moreover these increases will gauge by the increase in global consumption, which is projected to increase by 3.8 percent in 2009/10 led by increases in demand from China, India and EU-27.

    Supply dominance vs. demand dominance… Agri-commodities are most likely to be one of the few sources of investment gains in years ahead. Unfolding prosperity of China, and later from India has turned agri commodities into offensive investment. Supply is no longer the chief consideration. It was the time when green, yellow and white revolution were  there in the country, however at present context decades of supply dominance is missing and demand dominance has become the driving force with the rising consumption amid shrinking acreage area.

    Agro commodities are cyclical in nature…Agro commodities are cyclical in nature. It depends upon the demand and supply equilibrium. If supply of particular commodity is high amid tight supply, it results in higher prices of particular commodities, which is remunerative for farmers. With witnessing remunerative returns, in the next season, farmers switch to this product, which generally result in supply glut. Same trend occurred in wheat and rice in 2009. Higher prices in 2008 encouraged farmers to produce more grains and in 2009 world have ample supply of wheat and rice and farmers are not getting desired returns. Other factors also make agro commodities cyclical. Decline in numbers of hectares devoted to farming is also a major concern. For example number of hectares devoted to the production of wheat has been declining for last 30 years and inventory is at lowest level since 1970.

    Currency plays…Currency play is vital for demand supply equation. In general, if currency appreciates, it increases the domestic consumption. More valuable currency will make possible country to consume more. We should not forget that overvalued dollar assisted US to consume nearly 26% of the total consumption, regardless of contributing only 4% of total population. If currencies such as Yuan, Rupee etc., appreciate, food demand will improve and prices will jump everywhere.

    Behaviour of commodities during and after recession…During recession time commodity prices react negatively but it is short lived. A significant portion of the gains is occured during the early expansion phase after recession. In this recession we have seen same trend and most of the commodities have noticed the sizable gain, which we can see in above chart as well. According to an analysis, in the past 20 years, not even a single decline lasted more than 16 months from peak to trough. If we calculate the ongoing recession, it hit the economy in July 2008, and it has already been for 10 months. If we believe the same trend occurs, then may be trough will occur sometime before November 2009. Once the trough is made, commodity prices may gain an average of 33.2% in the next 12 months. But in this time, we have seen that trough has made early and commodities prices have already geared up. Even Bache Commodity Index and CRB index have started gaining on renewed demand. If this demand continues, commodity prices may be at higher by the end of 2009 and it is expected that the same trend will continue in 2010 as well.

    Future prospects…Well said by Commodity guru “Jim Roger” that agro commodity is the hot favorite for the investors for future. We are expecting a very tight supply condition by that time as we have limited land and yield is improving slowly on the flip side consumption is increasing at higher pace on the back of rising population and consumption. But by 2020, there will be three billion more people in the world. To meet the future demand we have to increase global agriculture production by 50% by 2020, which seems to be quite difficult. Reductions in plantings on the back of the economic crisis are also responsible for this decline.

    Conclusion…Despite some improvement in some economic indicators, we can’t say that we are out of woods. Recession pressure is still looming and in this scenario agri-Food investments have positive fundamentals due to inelastic demand amid declining production. With China and India income continuing to grow, global production is likely to fall in the coming year whereas global stock piles may move toward desperately low levels.

    Jun 15 02:06 am | Link | Comment!
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