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GOLD & SILVER OUTLOOK FOR 23 FEB 2015

Gold was little changed on Friday as investors eyed talks over Greek debt, but the metal was headed for its fourth straight weekly dip as a last-minute deal was expected to break the impasse over the Mediterranean country's bailout program me.Gold had initially seen some safe-haven bids as the uncertainty over the Greek crisis dragged on, but market concerns eased on hopes that a deal would be patched together. Spot Gold is at $1207. MCX Gold Apr is currently trading at `26278. It is trading up by `12 points for the day. Comex Silver is at $16.43. whereas MCX Silver Mar is currently trading at `36497,it is up by `77.

Gold

Feb 2015

Bullish Trend-26070, s1-25934 s2-25934,R1-26314 , R2-26487

Silver

Silver

Mar 2015

Bullish Trend-36170,s2-35698,R1-36670 ,R2-37030

IT'S REFORM TIME IN COMMODITY MARKET

Government seems to have  learnt  from  Rs. 5600 cr scam in NSEL ( National Spot Exchange) . After  the NSEL scam the turnover in the commodity exchanges has gone down drastically . For growing economy like India , we cannot afford the same.  In commodity exchange in the need of the hour is  right price discovery for the commodities that are being traded , however   due the reduced turnover market lacks depth and the objective is  not achieved.
Control of FMC shifted to finance ministry
The important step that has been taken  is the control of FMC (  Forward Market Commission )  the regulatory body of commodity exchanges has been shifted from consumer affairs ministry to finance ministry , however still lacks administrative free dom. The ultimate aim should be all the exchanges be it commodity , equity , currency should  be brought under the control of SEBI  with  requisite authority for effective  control , monitoring and prevention of scams .
Enhancing liquidity
FMC is considering   to introduce  “ market makers “  to  increase  turnover.  The price is the resultant  of trading which is outcome of supply and demand forces./  For this it is going to introduce  “ liquidity enhancement mechanism “ ( LES ) to encourage the brokers to participate activity and this create market makers.  Market maker is a  broker-dealer firm that accepts the risk of holding a certain number of units ( contracts)  of a particular commodity  in order to facilitate trading in that commodity  Each market maker competes for customer order flow by displaying buy and sell quotations .
Entry of FIIS and  commercial banks
The cost of transactions  in commodity market is high , in order to address this problem RBI is considering to allow the FIIs ( Foreign Institutional  Investors) and commercial banks to trade in commodity markets , this will serve the dual purpose  of  increasing the turnover in the market and  bring the cost of transactions down.  With increase turnover the will also serve the objective of right price discovery. At present commercial banks are not allowed to trade in commodity market under  Banking Regulation Act . However  government is considering amending the act  so that banks can participate in this market.  This will make the commodity exchange more live and active which had gone into huddle after NSEL scam broke out.
The flip side of FIIs participation
The FIIs have got massive financial power and the same has been demonstrated in the equity market  Indian stock market is virtually controlled by FIIs.  This may lead to  volatility  in commodity  spot prices and can  be serious cause of concern especially for agricultural commodities . Hence RBI and government  should strike the balance by equal participation by commercial banks and domestic financial institutions so that volatility   can be reduced to large extent and FIIs do not take the control of commodity markets .
Overall  it is  good that government  had decided to reform  the commodity markets as well , however  it  should be done with cautious and long term beneficial approach to benefit our economy

An Overview Of Commodities Trading

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Commodities markets, both historically and in modern times, have had tremendous economic impact on nations and people. The impact of commodity markets throughout history is still not fully known, but it has been suggested that rice futures may have been traded in China as long ago as 6,000 years. Shortages on critical commodities have sparked wars throughout history (such as in World War II, when Japan ventured into foreign lands to secure oil and rubber), while oversupply can have a devastating impact on a region by devaluing the prices of core commodities.
Energy commodities such as crude are closely watched by countries, corporations and consumers alike. The average Western consumer can become significantly impacted by high crude prices. Alternatively, oil-producing countries in the Middle East (that are largely dependent on petrodollars as their source of income) can become adversely affected by low crude prices. Unusual disruptions caused by weather or natural disasters can not only be an impetus for price volatility, but can also cause regional food shortages. Read on to find out about the role that various commodities play in the global economy and how investors can turn economic events into opportunities.

The four categories of trading commodities include:

• Energy (including crude oil, heating oil, natural gas and gasoline)
• Metals (including gold, silver, platinum and copper)
• Livestock and Meat (including lean hogs, pork bellies, live cattle and feeder cattle)
• Agricultural (including corn, soybeans, wheat, rice, cocoa, coffee, cotton and sugar)

·         Ancient civilizations traded a wide array of commodities, including livestock, seashells, spices and gold. Although the quality of product, date of delivery and transportation methods were often unreliable, commodity trading was an essential business. The might of empires can be viewed as somewhat proportionate to their ability to create and manage complex trading systems and facilitate commodity trades, as these served as the wheels of commerce, economic development and taxation for the kingdom's treasuries. Reputation and reliability were critical underpinnings to secure the trust of ancient investors, traders and suppliers.

Slowing US Economy Helps Precious Metals

Prices for gold rallied yesterday, followed by other precious metals, even though there is a strong case against buying bullion. Among possible reasons for today’s rally is the worse-than-expected economic data from the United States. The US economy grew 2.6 percent in the fourth quarter of the last year compared to the forecast of 3 percent and the previous quarter’s growth of 5 percent.
Precious metals often rally after bad news as traders seek safer assets. Additionally, the poor report hurt the dollar, increasing value of commodities priced in the US currency. Gold is still heading to a weekly loss but is going to end the month with gains.
April futures for delivery of gold rallied 1.43 percent to $1,272.60 per troy ounce as of 16:47 GMT on COMEX yesterday. Contract for silver gained as much as 2.34 to $17.17 per ounce. Spot price for platinum added 0.71 percent to $1,230.25 per ounce while price for palladium rose
0.44 percent to $777.19 per ounce.
Silver
Unlike gold, silver is not such a popular instrument to hedge against the inflation or to make the long-term investments. The global demand for silver is rather low, but nevertheless it becomes more and more popular among the commodity speculators. Silver production, financial news and the demand updates affect the spot and the futures prices for silver.

Most commodity prices expected to continue declining in 2015

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This year may well see a rare occurrence for world commodity markets – a decline in all nine key commodity price indices, says the World Bank's latest Commodity Markets Outlook, released on Thursday.

While oil prices have seen the most dramatic decline, the third largest since World War II, other commodities have also been gradually weakening in recent months. And this broad-based weakness is expected to continue throughout 2015, before beginning a modest turn around in 2016.
In oil markets, a “perfect storm” of conditions has led to a plunge in prices since mid-2014: growth in unconventional oil production, decline in demand, appreciation of the U.S. dollar, receding geopolitical risks, and a major redirection toward maintaining market share rather than targeting prices by the world’s oil cartel, Organization of the Petroleum Exporting Countries (OPEC).
Further, oil prices have dropped 55 per cent in seven months, from the most recent high of USD 108 per barrel in mid-June 2014 to USD 47 two days ago. Should the current slide continue, it could surpass the previous records of a 7-month decline of 67 per cent, set in 1985/86, and a 75 per cent drop in 2008, it said.

GOLDEN RULES FOR MAKING PROFIT IN COMMODITY CYCLE

The price of commodities is influenced by both natural and man-made cycles. By understanding the prevailing cycle (expansion or recession) to which a commodity is associated, a trader can make better decisions related to the trade entries and exits. Additionally, the study of cycles and the correlation between stocks, bonds, commodities and the US dollar would enable a trader to confidently shuffle and maintain the right-mix of portfolio. Thus, experienced individual traders and fund managers constantly look the cycle (most suited to gauge a commodity) scenario before making investment decisions.

The following are the widely recognized strategies adopted by traders, focused on different financial markets, to gain from the well-known market cycles.

Annual / Seasonal cycle

Climatic conditions affect the planting, growth and harvest of crops. This in turn impacts the supply thereby leading to a change in price. Thus, commodity traders monitor the seasonal influences to forecast the future price. A seasonal trader identifies the rhythm of price movement and timing of tops and bottoms in price. The data is then used to enter and exit the seasonal cycle. Traders use the seasonality to enter and exit as follows:

1. Corn: An entire corn season (in USA) can be divided into three recurring periods:
1. Late spring to midsummer
2. Mid-summer to harvest time
3. After harvest.

Price of corn tends to decline from mid-summer to harvest time. The price stays near the peak in June and July on expectations of new crop harvest. After harvest period the price starts recovering. The price of corn, however, remains under pressure in February. To sum it up, a seasonal corn trader should look for buying opportunities between August and October. Selling (or shorting) should be done between June and July.

2. Soybeans: Seasonal price behavior in relation to growth and harvest is seen in Soybeans as well. The price of Soybeans usually shows weakness in the months of June, July and August. The last week of June will have prices lower than previous weeks. Similarly, the traded price in the last week of July and August will be generally lower than the previous weeks. In comparison to the last week of December, the price tends to remain higher in January. The ‘February Break’ phenomenon keeps the price of Soybean subdued. Thus, June, July and August are months to remain in short while the last week of December is ideal for accumulation.
3. Wheat: The cyclical period of price weakness usually begins in January or February. The period between harvest low and early winter (October /November) is the best period to go long. Wheat prices tend to decline during the last weeks of winter and spring (final stage of harvest). The wheat prices in the futures market also remain weak from winter to summer harvest period.
4. Live and feeder cattle: Live cattle prices remain on the higher side from January till May where it touches the seasonal peak. The prices then start to retrace slowly for the rest of the year. Thus, it is better to take long position between January and May in the futures market. Short position is ideal for the rest of the year. The seasonality factors related to live cattle prices affect the feeder cattle cycle. The, feeder cattle prices remain stronger from late winter to spring. The price starts dropping during the summer. A feeder cattle trader should look for long trade opportunities from winter to spring. Short selling opportunities should be given priority during the summer season.
5. Live hogs: The price of live hogs increases from March to May and decreases from May to August. This cyclical price change is attributed to the seasonal declines in slaughter levels from March-April into July-August. Additionally, the price fluctuation is also because of the seasonal increase in farrowing between August and September in comparison to other months. Thus, a live hog trader is advised to take long position from March to May and short positions between May and August.
6. Cocoa: The price of cocoa usually begins to rise in May or June and continues its upward trend till late fall and start of winter. However, the demand starts to wane in the last leg of the year thereby putting downward pressure on the prices. By January, cocoa prices hit their cyclical low. It should be noted that cyclical impact is not very much strong in cocoa. So, a trader should be very cautious while taking a long position in the month of January or short position before the start of winter.
7. Coffee: Brazil is a major producer of coffee. Thus, intensity of frosts, which occurs between May and early August in Brazil, affects the price of coffee. The price generally rises from January to June and starts declining later on. During winter season in United States, coffee consumption rises. This cyclical pattern results in a price rise as well. It should be noted that yields from other major coffee producing countries such as Mexico should be taken into consideration before entering a trade.
8. Cotton: It is one of the most traded commodities with price depending heavily on the deliveries made against the expiration (December, March, May and July) of futures contracts. The seasonal cycle is such that price declines to low level in January and recovers (after harvest low) in November.
9. Orange juice: In the case of frozen concentrated orange juice the cyclical factor is a function of harvest, production and demand. The price sees a decline from November to January. This is quite different from other seasonal cycles in the sense that it does not entirely follow the frost period, which is from December to February in the southern part of USA.
10. Sugar: Traders who are well aware of the seasonal price cycle of sugar know that prices usually reach the peak in November. So, it would be the ideal time to close the long position or even go short. The reason for the high price is attributed to the northern hemisphere’s demand coupled with a lack of supply (Shipments from Europe would not have started).

11. Unleaded gas: The seasonal cycle also affects the price of unleaded gas. The price usually rises from February until May. This is because of the purchases made ahead of the Memorial Day (May end) which marks the arrival of the summer driving season. Seasonal cycle traders prefer to take long position between February and May, to gain from the price rise.
12. Natural gas: It is a raw material used by power sector to produce energy. Natural gas is also used in residential homes. A strong economy and extreme cold can increase the demand. Considering the production and demand level, traders usually buy between June and August and sell between December and January.
13. Treasuries: There exist an inverse correlation between Treasury bonds and equities. The cyclic nature of the Treasuries is such that the price undergoes a decline in the first half of the year and rises in the second half of the year. The lowest price is usually recorded in the month of May. Traders who track seasonal cyclic patterns generally look for a purchase opportunity in May.
14. Copper: The price of copper increases in the month of May and declines in the month of September. This is because construction activity generally peaks during the spring and slows during falls. Correspondingly, there arises a seasonal change in the price of copper every year. Futures traders take these details into consideration before entering a trade.
15. Equity: There is a seasonal cycle associated with equities as well. The equities tend to perform better between November and April. The decline begins in May and continues throughout the summer period. Stocks are again bought in autumn, usually around the Halloween. Traders prefer to remain liquid (with cash) between May and November. The reason behind the trend is unclear but certainly puts a question before the efficient-market hypothesis, which says that stock market returns should not be lower than the short-term interest rate.

Additionally, there is something called ‘Calendar effect’ in equities. Most of the small stocks outperform broader market in January compared to other months. Thus, traders tracking seasonality buy small-cap shares in the last week of December to profit from the cyclic behavior of stocks. The disparity between small and large stocks reaches the peak during the mid-January period. The largest ‘January effect’ is seen on the third year of the US Presidential term.

Production cycle

16. Palm oil: The low production cycle spans between January and March while the peak production period of palm oil is between June and September. Thus, prices tend to move upwards from January until March. The arrival of additional supplies results in a price decline from April onwards. In a case where the production falls below the average, the price tends to remain strong for the rest of the season.
17. Heating oil: The price of heating oil generally goes up during summer (July to October). This is because the price of heating oil is much affected by demand rather than supply. Refineries and commercial establishments build inventory during summer to meet winter’s demand. The price drops when the stocks are liquidated during normal winter season. Traders take advantage of such a seasonal cyclical pattern and take long position during summer season and short position during winter season. However, there is a note of caution. The price can also go up during a harsh and prolonged winter season.
18. Crude oil: The price of crude oil usually rises in the extreme winter season. Furthermore, vacation period (active driving season) usually results in higher crude oil prices. On the other hand, the demand for heating oil during harsh winter indirectly propels the price of crude oil. Other than the two factors, traders watch for production increases or cuts by oil producing and exporting (OPEC) nations. An increase in the supply results in a sharp price decline and vice versa.
19. Equity market: GDP (gross domestic production) leads corporate earnings by one quarter while corporate earnings lead stock market cycle by one quarter. Thus, GDP leads stock market cycle by two quarters. A decline in GDP is usually reflected in the price of stocks in two quarters. Traders following the GDP can accordingly time the entry or exit from the market. Equities begin to perform well after recession low passes. Traditionally, second and third quarter earnings would be strong for companies. However, the prices of commodities gain when inflation is near its peak.
20. Bonds: When business cycle is low, bonds tend to perform well. In other words, bonds gain in value during deflation. Thus, a bond trader should look for indications of sluggishness in business cycle to exit from stocks and invest in bonds.
21. Platinum and Palladium: These two precious metals are often overshadowed by gold and silver. Both platinum and palladium are more of an industrial metal. As economic activity increases, the price of platinum and palladium surges. They have an inverse correlation with the US dollar cycle.
22. S&P 500 index: The price of industrial metals is less susceptible to supply shocks (unlike stocks linked to oil). As the economy expands, the demand for industrial metals grows and this leads to a rise in the stock price of companies producing the respective metals. The industrial metals share a positive relationship with the S&P 500 index. Thus, traders use economic cycles to forecast the top and bottom of the S&P 500 index and profit from it by taking long and short position at the ideal time.

23.  Gold: The US dollar shares an inverse relationship with gold. A fall in the US dollar is reciprocated by a gain in the yellow metal. This is because, gold is considered as a safe haven investment. Additionally, the currencies of other countries gain in value when the US dollar declines. This increases the demand for commodities including gold thereby resulting in a price rise. Precious metal traders monitor the US dollar to enter and exit from gold. Gold normally touches a low in August.

24.  Silver: Similar to gold, the US dollar shares an inverse relationship with silver. Additionally, traders monitor the silver-gold ratio to determine whether to buy gold or silver in the case of decline in the US dollar. On an average, the silver-gold ratio (price of gold / price of silver) stands at 55:1. Silver is considered to be a better choice to buy if the ratio is higher and vice versa. Silver usually hits a low in January and high in March.

25.  Bonds: The US dollar cycle also impacts the rise and fall in the price of bonds. As US dollar rises, bond prices also tend to rise and vice versa. This is because a strong US dollar discourages US exports thereby bringing down the valuation of stocks. Ultimately, the price of bonds will increase as investors flock to bonds whose valuation will become more attractive. Bond traders track the US dollar index (compares the movement of the US dollar against a basket of currencies) to enter and exit the bond market at the right moment.

26.  Crude oil: The US dollar has an inverse relationship against the commodities and crude oil is no exception to this. Internationally, all the commodities are priced and traded in US dollars. Thus, a strengthening US dollar would naturally mean that it takes less amount of the currency to buy the same amount of physical assets. Crude oil and the US dollar usually have a ratio of minus 0.88. Traders use the data to identify price divergence and take a suitable buy or sell position.

27. Corn & wheat: A 28-day cycle represents 28 calendar days, which translates to twenty trading days. The commodities, in particular corn and wheat, exhibit 28-day cycle. As per this theory, a break out above the four week high confirms the beginning of a new uptrend. The inverse is true for a downtrend.
28. S&P 500, DAX and STRAIT indices: A lunar cycle is the sidereal orbital period of moon which spans around 27.5 days. Scientifically it has been observed that a full moon imparts pessimism while a new moon advocates optimism in human beings. A study of lunar cycle effects on major indices has proven that almost all the gains made by the financial markets are during the positive lunar period. The disparity is seen more in the DAX (Germany) and STRAIT (Singapore) indices. Thus, lunar cycle traders take long positions during the beginning of new moon period and liquidate the position on or before the full moon period. Statistically, it has been proven that a trader who had taken only long position during the positive lunar cycle in the Singapore market would have made 124% returns between 1994 and 2013. The percentage is even higher at 149% in the case of the DAX index. However, it must be noted that commodity prices are very less influenced by lunar cycle.

29. Equities: When equities do not perform well in the first month of a year then the same trend is reflected for the rest of the year (& final months in particular). Such a phenomenon is known as January cycle. There is a popular statement which says “As January goes, so is the rest of the year”. If the stock market did not have a great opening in January then traders who are well aware of the January cycle remain cautious and stay away from making large commitments. It should be noted that “January cycle” and “January effect” are not related to each other.
30. S&P500 index : The January cycle also influences the performance of S&P500 index. The first five trading days of January are closely watched by S&P 500 traders since the performance gives an idea of what the rest of the year would be. If the beginning of the year is not encouraging then traders would remain cautious and avoid taking large positions. On the other hand, traders following January cycle would take large positions if there is an appreciable gain in the opening of the year.

The Presidential cycle

31. Equities: The four year presidential period has a cyclical effect on the performance of the US equity market. Equities tend to perform better in the pre- and election years. On the other hand, performance of the equity market in the 1^st post- and 2^nd post-election year is weak.
32. The DAX (Germany) index: Historically the DAX index remains flat and subdued in the election year and 2^nd post-election year respectively. However, the index rises in the first post-election year. The same trend is seen in the pre-election year as well. Traders monitoring the US presidential cycle take the discussed fact into consideration before making a trade in the market.
33. Dow Jones index: Most of the major indices around the world experiences the presidential cycle. The impact, naturally, is seen in the US as well. The Dow Jones index always remains cautiously optimistic in the election year. The first post-election year sees a rise in the Dow Jones index. On the other hand, the Dow Jones index remains essentially flat in the 2^nd post-election year. Finally, the Dow Jones again rallies in the pre-election year.
34. The US dollar index: The presidential cycle impacts most of the currencies directly or indirectly (through the US dollar) as well. The US dollar index generally rises in the election and first post-election year of the presidential cycle. The final two years (2^nd post-election year and pre-election year) sees a decline (most of the decline happens in the 2^nd post-election year) in the US dollar index.
35. Gold: The yellow metal remains calm in the election and first post-election period of the presidential cycle. The 2^nd post-election year and the pre-election year have a positive effect on the price of Gold. Invariably, all the uptrend in price is seen during this period.