How to Make Money in Commodities

Making money in commodities is not easy. About ninety percent of commodities traders lose money rather than make it. One reason why commodities trading is difficult is because there is no right time of when to enter or exit the market (i.e. you cannot time the market). It is essential for you to understand the market. You must also learn how economics can affect prices of commodities. There are many ways to invest in commodities, including the futures market, buying the actual commodities (gold and silver are examples of easy-to-store commodities), Commodity ETFs (exchange traded funds), and stocks whose business model involve commodities. This article will focus mainly on the commodities futures market. You must decide what futures contracts you want to buy, study the charts and develop your trading strategy.

Deciding on your investment plan for the year may not always be the easiest of tasks. If you had enough of riding the stock markets and don't fancy debt, here is an opportunity to do something different. 

Commodity markets are offering an annualized return of anywhere between 18 per cent and 24 per cent. In comparison, debt markets are offering returns in the range of just 8-10 per cent. "The commodity markets are still at a nascent stage and offer the best returns on arbitraging - locally as well as internationally." once the markets mature, returns will automatically settle at lower levels. Once mutual funds and foreign institutional investors are allowed to trade in the markets, volumes will rise, but returns for individual investors will stabilize. So, if you are thinking of taking the plunge, it is a good time now. Nair suggested a five-pronged strategy to invest in commodity markets. The Cash-and-Carry Arbitrage: This is the easiest form of arbitrage, where the investor has to buy the commodity in the spot market, and sell it in the futures market. This is largely successful in gold and silver, and is also popular among various agricultural commodities. Calendar Spread; This is done between futures contracts. The investor buys the near month contract (ex: October gold) when prices are low, and sells in the forward month contract (December gold) when prices rise, or sell the positions in the near months, and purchase the forward months contracts. This trading is popular in gold, soya, silver, crude, chana, urad, jeera, and chilli. Spread between commodities with high correlation: Here, examples are gold and silver, gold and crude etc. Inter-exchange arbitrage: This is popular among liquid commodities like gold and silver, where the arbitrage can take place between the Indian exchanges and the foreign exchanges, where contract specifications are similar.

Trading calls: Here, the trading is largely dependent on the direction of the trade. A good mix of commodities and disciplined trading will ensure that the investor makes money on the commodity markets,. While the ratio of profit and loss may vary, if an investor were to park Rs 25 lakh (Rs 2.5 million) in commodities using these strategies, of which Rs 20 lakh (Rs 2 million) through the four arbitraging strategies and Rs 5 lakh (Rs 500,000) in trading calls - taking data from the last quarter he would earn a return to the tune of 5-6.5 per cent during the period. The investor, at any given time, is likely to make at least three times the profit for every loss that he incurs - that's a 3:1 ratio of profit and loss.

HOW TO TRADE IN COMMODITY FUTURES

You as a trader should determine your limits for profit and loss. A dealer should keep limits for the amount and quantity of commodities; both sold and bought. If the Futures prices for two months are close to the day-to-day price, it is the best time to buy. If the profit is sure to exceed even one rupee per kilo, sell. If there is a constant loss, do away with the deal even if it is in loss, without waiting much. You can regain the loss later by selling or buying. A trader who can make the right decisions would make more profit from the Futures market than he would perhaps make from the stock market or real estate deals. While stock market demands at least 50% of the whole value, dealer needs to spend only 6-15 percent as margin money in Futures Market. If the trader’s judgment is good, he can make more money faster because prices tend to change more quickly than real estate or stock prices. On the other hand, bad trading judgment can ruin you. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract (usually 10 percent of less) as margin. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Moreover the commodity futures investor is not charged interest on the difference between the margin and the full contract value. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. 
There is no clear demarcation regarding the deals. Practically anyone can do any kind of dealings. However, one should take intelligent decisions by evaluating the ups and downs of commodity in the spot market. Normally, as the term period increases Futures value may increase. But this need not happen at all times. As the period decreases the difference in the price in the spot market will decrease too. On the 15th of every month, the ready market price and Futures price should be the same. 
Hedgers and Speculators 
There are two basic categories of futures participants--hedgers and speculators. 
In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem. 
Hedgers are very often business houses, exporters, traders, farmers or individuals, who at one point or another deal in the underlying cash commodity. 
Take, for instance, a major food processor, who trade in pepper. If pepper prices go up he must pay the farmer or pepper dealer more. For protection against higher pepper prices, the processor can “hedge” his risk exposure by buying enough pepper futures contracts to cover the amount of pepper he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if peppers prices rise enough to offset cash pepper losses. 
Speculators are independent traders and investors. Independent traders, also called “locals” trade for their own accounts. For speculators, futures have important advantages over other investments, as we have explained elsewhere. 
There are many ways to trade in the futures market 
One way is to calculate the approximate production of a commodity and sell it in the commodity market, which will be harvested many months later. The farthest month possible form harvesting would be the best choice. Assume that the best possibility to get best price is in the farthest month and fix the deal. When the period ends you can bring the goods to the Warehouse, receive the receipt, give it to the dealer and finish the deal. 
Now think of a situation that you sold the commodity on the Futures market when you were actually holding it. That is, you sold 2 tonnes of rubber you had, in the Futures market. Then you find the price going down in the Futures market. You can wait for the whole period and can buy back as much rubber as you had sold. This process is called squaring. In addition to the profit in the Futures market you can sell it in the ready market for whichever amount you receive and can gain that profit too. 
The next method is that the farmers themselves can do the speculation. Sell the commodity, which is with you in the ready market. You will get ready cash. Then invest some of this amount in the Futures market if the price is rising there. Then you can sell this when the price is high and gain profit. 
Another method is similar to this. The farmer sells his commodity in the ready market and gets ready cash and in the same month he buys that much of goods from the Futures market on the day on which the deal ends (15th). Since it is bought on that day’s Futures there is no time to square and finish the deal. The goods have to be bought by giving the full price itself. When you spend this money you will get the warehouse receipt. There is 3 months’ time to take the goods out of the warehouse. Let the goods remain there. The warehouse receipt is valid for 3 months. You can pledge this legal document or can keep it as a deposit document.

OUTLOOK FOR GOLD, SILVER, CRUDE, COPPER

Gold gains on back of weak US data

After remaining stead at the benchmark level of USD 1,200 per ounce, gold suffered a downfall in the past few days. However, on the back of weak US data, the precious metal has regained some of its position and is trading steadily between USD 1,993 – USD 1,995 per ounce. The US had released sluggish data yesterday – jobless claim, home sales and manufacturing – all posting less than expected figures. This lead to investors looking at gold as safe haven, helping the metal gain 0.6 per cent as compared to the previous session. Though, gold may see further hike in prices going forward, one also needs to focus on the Federal Reserve’s announcement for interest rate hike next week.

Silver may trade at USD 16.50 in 2015

Silver is expected to maintain an average price of USD 16.50 per ounce in the spot market this year, as per a report by Mitsubishi UFJ. The metal might see further weakening in the second quarter of this year, but may recover in the second half of the year, with possible rise in industrial demand. However, in case gold gets impacted due to the impending hike in interest rates in the US, silver may also feel the effect in prices. Fall in prices may provide opportunities for the physical market. Investing in the metal in the short-term may not provide much gain.

HOW TO TRADE IN COMMODITY FUTURES

You as a trader should determine your limits for profit and loss. A dealer should keep limits for the amount and quantity of commodities; both sold and bought. 

If the Futures prices for two months are close to the day-to-day price, it is the best time to buy. 
If the profit is sure to exceed even one rupee per kilo, sell. If there is a constant loss, do away with the deal even if it is in loss, without waiting much. You can regain the loss later by selling or buying.  A trader who can make the right decisions would make more profit from the Futures market than he would perhaps make from the stock market or real estate deals. While stock market demands at least 50% of the whole value, dealer needs to spend only 6-15 percent as margin money in Futures Market.  If the trader’s judgment is good, he can make more money faster because prices tend to change more quickly than real estate or stock prices. On the other hand, bad trading judgment can ruin you.  Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract (usually 10 percent of less) as margin. The actual value of the contract is only exchanged on those rare occasions when delivery takes place. Moreover the commodity futures investor is not charged interest on the difference between the margin and the full contract value.  Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution.  There is no clear demarcation regarding the deals. Practically anyone can do any kind of dealings. However, one should take intelligent decisions by evaluating the ups and downs of commodity in the spot market. Normally, as the term period increases Futures value may increase. But this need not happen at all times. As the period decreases the difference in the price in the spot market will decrease too. On the 15th of every month, the ready market price and Futures price should be the same.  Hedgers and Speculators  There are two basic categories of futures participants--hedgers and speculators.  In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. The rationale of hedging is based upon the demonstrated tendency of cash prices and futures values to move in tandem.  Hedgers are very often business houses, exporters, traders, farmers or individuals, who at one point or another deal in the underlying cash commodity.  Take, for instance, a major food processor, who trade in pepper. If pepper prices go up he must pay the farmer or pepper dealer more. For protection against higher pepper prices, the processor can “hedge” his risk exposure by buying enough pepper futures contracts to cover the amount of pepper he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if peppers prices rise enough to offset cash pepper losses.  Speculators are independent traders and investors. Independent traders, also called “locals” trade for their own accounts. For speculators, futures have important advantages over other investments, as we have explained elsewhere. 

GOLD TREND FOR 30 MARCH 2015

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Gold eased on Friday as traders booked profits after a seven-day rally and as the dollar rebounded on strong US data, but the metal still looked set to post its second straight weekly gain on expectations US interest rates will stay low for longer. Gold is weakening because of profit-taking and a slightly stronger dollar. Gold prices fell by 0.38 per cent to Rs 26,948 per 10 grams in futures trade today as speculators locked-in gains amid weak global trends. Silver prices fell sharply by Rs 197 to Rs 38,900 per kg in futures trade today due to profit-booking at existing levels and weak trend overseas. 

The Gold is in perfect uptrend .Currently Gold is showing some up move after small correction and trend is strong and supported with good volume The open interest is not increasing with trend. Caution note buying at higer levels seems decreasing. The Gold is now trading in overbought level. The Gold is now trading in overbought level.

R2	R1	PIVOT POINT	S1	S2
27096	27047	27000	26676	26576

 

BULLIONS OUTLOOK FOR MONDAY 23 MARCH 2015

BASE METALS

Base metals on the LME traded lower weighed down by economic weakness in top consumer China and expectations the Federal Reserve will prepare the ground for an increase in US interest rates. 
GOLD 
Spot gold prices rose by 1.58 percent to close at $1166.8/oz, its biggest rally since January after the Federal Reserve signaled a more cautious outlook for U.S. economic growth, and the dollar tumbled.

R3	R2	R1	PP	S1	S2	S3
37974	37038	36705	36102	35769	35166	34230

● When to sell Silver?  
Watch out for S1, if it touches the target and the market recovers by 80 points thereafter, our analysts suggest investors should sell silver, with the stop loss of S1 + 150 points. The targets in this case would be S2 and where S3 will become the strong support.