lalit trades investing opportunities in commodity markets

7/28/2019 Lalit Trades Investing opportunities in commodity markets.

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21stApril 2013

Presented ToBorivali (Central) CPE Study Circle

OfWIRC of the Institute of Chartered Accountants of India


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` God wants us to prosper financially, to have plenty of money, to fulfill the destiny he has laidout for us.

` Money is a guarantee that we may have, what we want in the future. Though we need nothing at themoment it insures the possibility of satisfying a new desire when it arises

`Wealth is not a matter of intelligence. Its a matter of inspiration` Money will make you more of what you already are. Ifyoure not a nice person, moneys going to make youa despicable individual. If you are a good person, moneys going to make you a better person.

` If a person gets his attitude toward money straight, it will help straighten out almost every other area in hislife.

` Moneyisnt everythingbut it ranks right up there with oxygen.`The only thing that money gives you is the freedom of not worrying about money.

`Wealth is known to be a great comforter.` Success is having to worry about every damn thing in the world, except money.`You can be young without money, but you cannot be old without it.

` Moneydoesnt buy happiness, but it will solve any problem you can write a check for, and that covers a lotof problems.

WHAT MAKES MONEY/ RICHES / WEALTH SO IMPORTANT IN OUR LIFE ?


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MOST FAVORED MARKETS FOR WEALTH CREATION


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The markets for investments are not limited, but commodity markets are more stable because they areregulated with delivery mechanism the scope of price manipulation is very limited and controlled. The Commodity Markets follow a seasonal pattern, which also makes it a safe investment avenue.Commodity prices reflect realistic economic factors more precisely. The Commodity Markets also hold certain degree of certainty in a very uncertain market and the price movesdo not divert from the fundamentals for a longer period as opposed to the other markets. Diversification into commodity market offers tremendous scope to become a separate asset class for investors,arbitrageurs and speculators. Commodity trading can be used to hedge against inflation, currency fluctuations and event risks. It gives the option to directly invest in the commodity rather than in commodity stocks which are alsoaffected by other factors along with the commodity prices. Commodity markets are established as an asset class worldwide. In India commodity futures markets havebeen in origin since 1921 with the Cotton Exchange. In the 1940s and 1970s commodity markets did facesome difficulties due to government regulations. In 1999 since the opening up of the government to remove allcommodities from restrictive list and incorporation of proper regulations and guidelines the markets are nowvery controlled and stable. To sum up, commodity markets if traded under proper guidance and discipline can reap enormousreturns.

WHY COMMODITY MARKETS ?


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Spot markets are basically the Mandis where the agriculture produce is bought in to a centralized locations by farmers and auctioned.

Mostly used by farmers, traders and wholesalers.

Forward markets / forward contracts are agreement to purchase or sell a specified amount of commodity on a fixed future dateat a predetermined price. Physical delivery is compulsory.

Futures markets / futures contracts are exchange traded agreements to buy or sell a given quantity of a commodity

at a predetermined price and time. But unlike forward contracts, physical delivery is not necessary, instead it is

offset on maturity date with reverse transaction.

COMMODITY MARKETS ARE DIVIDED INTO 3 MAJOR MARKETS


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Commodity Futures Markets Have The Following Users:

Farmers Traders / Stockists Corporates / Exporters Arbitrageurs / Speculators

With all the participants mentioned above that are active today in the

commodity markets, there is one class that is missing..

THEINVESTORS

The only reason why there are no investors in the commodity futures markets

is because all the above classes mentioned above are only using this market tohedge their physical commodity against any wild price fluctuations, withexception to arbitrageurs or speculators who are merely interested in profitingfrom the price fluctuations.

THE USERS OF COMMODITY MARKETS


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An investor makes a very calculative trade to earn returns on investments over alonger period of time. Commodity Futures Market serves as one of those investment

markets.

Commodity markets if approached with a long term view based on factors like,demand and supply, weather fluctuations & economic fluctuations can give the trendof that commodity and accordingly traded in futures markets with rolling positionsover a period of time.

Even though commodity futures trading profits are calculated as speculation incomeand not business income, the returns can be much more than the returns from anyother markets. But the approach has to be very disciplined be that any marketincluding commodity. (example of systematic approach to the commodity markets isexplained in following slides)

Creating wealth should not be limited to only few markets. Wealth flows in fromwhere ever money flows.

Commodity Futures allows create wealth without huge investment. It allows tradein big quantity with fraction of margin. All commodities can be traded in futures

markets as opposed to equity markets where futures are restricted to few scrips.

THE COMMODITY INVESTORS WAY TO WEALTH


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SYSTEMATIC APPROACH CASE STUDY 1. COTTON FUNDAMENTALS


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www.lalittrades.com

CASE STUDY 1. COTTON TRADING ANALYSIS


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The previous 2 slides give a very clear picture of the fundamentals and the price movement ofcotton.

A clear disconnect between supply and demand made the prices of cotton move from point 1.to point 2. on the chart. (Sudden drop of production in the year 2008 and 2009,consumption exceeded supply chart 1 & 2)

With such clear fundamentals in place, a futures market allows to trade cotton in internationaland also in domestic exchange. Since cotton is also traded domestically the advantage is not

missed.

Had this trade been done in the spot market it would not be feasible for a investor, as the costof maintaining the inventory do not prove to be very profitable in returns. (cotton is moistureabsorbent hence cannot be stored over years)

Futures market allows the investor to trade such big moves with margins ranging from 5%-

35%. (35% margins on extreme volatility)

The futures market also pushes away the possibility of big loss as the contracts can becancelled off immediately as opposed to spot market where the investor is burdened withphysical delivery of the said commodity. Because a sudden fall in prices will make it difficult todispose off the physical stock.



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Informed calculations for entry and exit point, result into a trade strategy that are protected bystop losses.

This trade opportunity may rarely occur in equity markets, as the scrip of the company that isthe purchaser of cotton, may not be available to short in the markets. The cotton trade onfutures exchange does cover up the losses of the investor who is invested in such cottoncompany scrip. This becomes a hedge as well as an open trade strategy to profit as well as cutlosses.

A similar trade opportunity also arises from price point 2. to price point 3. where a shortposition can also result into profits, based on calculated trade strategy. (production of cottonexceeded in the years 2010 and 2011. The price rise encouraged the farmers to increasecotton production- chart 1 & 2)

The shifts in fundamentals are caught precisely in commodities and the price moves cannotdeviate from the fundamental for very long periods of time as opposed to equity index and

equity scrips.



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SYSTEMATIC APPROACH CASE STUDY 2. SUGAR FUNDAMENTALS

India Sugar cane and Sugar Production


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2008-$147

SYSTEMATIC APPROACH CASE STUDY 2. SUGAR FUNDAMENTALS

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CASE STUDY 2. SUGAR TRADING ANALYSIS

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Brazil and India contribute more than 40% of sugarcane crop to the world supply. ( chart 3)

World crude oil prices started a bull run in 2006-07 from $ 40 to $ 147 in 2008. (chart 8).This bull run resulted in boost in ethanol production by Brazil from sugarcane (chart 5), asethanol became the blending substitute with gasoline to cut the fuel consumption at such highprices.

This demand rise of ethanol put pressure on the prices of sugar from point 1. to point 2. , asmore of sugarcane started being diverted to ethanol production by Brazil- the number 1

producer of sugarcane in the world (chart 5). The production of ethanol picked up since 2006(chart 7) and so did exports from Brazil.

World cane production further came under constraint in 2007-08 when the second largestproducer of sugarcane India suffered drought condition and it continued till 2009-10. (chart2 & 4)

This production shortfall further fuelled the price rise of sugar till 2008-09.

With the global meltdown in 2008-09 the prices of crude dropped to around $24, whichresulted the sugar prices to also fall due to fear, as ethanol use could only be feasible with highcrude oil prices. Price moved from point 2. to point 3.


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In 2009-10 and 2010-11 India sugarcane production levels were still notup to the previous levels, and the crude oil prices again rising from 2009

(Americas quantitative easing) to reach over $ 100 in 2010 further fuelledthe price rise of sugar from point 3. to point 4.

In 2011-12 with the Indian sugarcane production reaching comfortablelevel, Americas own crude oil production rising, Brazils reduced ethanol

production eased the constraint on sugar prices which resulted in price movefrom point 4. to point 5.

Right from 2006 till present sugar has given 5 opportunities to trade onboth sides of the markets irrespective of the moves of the equity markets .

The moves have been completely in rhythm with the tight fundamentals.

Again with limited opportunities in the equity markets with regards to sugarscrips which follow the index direction more as opposed to the commodityfundamentals, commodity futures plays the role of hedge against falling sugarscrips investments and trade profits


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SYSTEMATIC APPROACH CASE STUDY 3. CRUDE OIL FUNDAMENTALS


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SYSTEMATIC APPROACH CASE STUDY 3. CRUDE OIL FUNDAMENTALS


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CASE STUDY 3. CRUDE OIL TRADING ANALYSIS

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As can be seen from the crude oil price chart, the market offered in total fiveopportunities for trading.

The price move from point 1. - $ 18 to point 2. - $78 can be understood from thedeclining American crude oil output as shown in chart no. 3. At that point of time

America was the worlds largest consumer of crude oil.

With such big supply being wiped off, the pressure was absorbed (to some extent)

by the Middle East countries to substitute the declining American supply as can beseen in chart no. 1. ( also to be noted the cut off of supply from Iraq during the

American invasion in 2003)

Even though the supply was increased by the other oil producing countries thedemand too kept rising at a much faster pace as opposed to supply. Chart no. 2

clearly explains the boom in the demand bought in by America, Europe but mostly bythe emerging economies of Russia, India and China where the GDP growth rates weremore than 8% (chart 5). This further fuelled the prices of crude oil from point 2. topoint 3. where crude oil prices reached a historic high of $147. Global shipping ratestoo showed a commendable rise since 2006 due to increase in the global shippingactivities (chart 4).


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It can also be observed that the Middle East too reached a tipping point in production andthe first major decline started in 2006 right up 2008 (chart 3), which further tightened

the global supply and fuel to the rising prices.

The price movement from point 3. - $147 to point 4. - $27 can be attributed to a mixof various fundamentals- 2008 the American crude oil supply started rising (chart3)(supply increase), the financial meltdown hit America with collapse of Lehman Brothers(chart 6) (demand declining), 2009 Greece starts the meltdown of Euro with demand ofbailout (chart 6) (demand declining), emerging economies Russia, India and China GDPgrowth slows down (chart 5) (demand declining), Iraq resumes its crude oil supply (supplyincrease) and America reaches its 2001 levels of crude oil production (chart 3) (supplyincrease).

Price rise from point 4. to point 5. can be attributed to the resumed growth of theAmerican economy due to quantitative easing, which resulted in demand resuming in the

markets. The emerging economies too, Russia, India and China (specially China) showedsome improvement in their economies.

The crude oil contracts are available on the Indian exchanges to trade and the moneymaking opportunities were not limited to only 1 but extended to 5 on both sides of thetrend.


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SYSTEMATIC APPROACH CASE STUDY 4. SILVER FUNDAMENTALS


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SYSTEMATIC APPROACH CASE STUDY 4. SILVER FUNDAMENTALS


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CASE STUDY 4. SILVER TRADING ANALYSIS

www.lalittrades.com


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Silver is derived from 3 main sources as explained in chart 8. Chart 1 shows clearlythat the mine production has never been able to match the demand of silver. The

demand for silver was always setoff by the sales from government stocks.

The price movement from $5 point 1. to $21 point 2. can clearly attributed tothe rise of accumulation of silver by the Exchange Traded Funds as can be seen fromchart 6.

The prices moved from $ 21 point 2. to $8 point 3. following the globalmeltdown started in 2008 and ended in the same year.

In the year 2009 the prices started recovering from $ 8 point 3. to $ 49 point 4.. This recovery is attributed to the sudden rise of demand for silver as an investmentavenue as the purchases ofETFs still continued at a much faster pace as seen in

chart 6. The fall in inventory levels of silver in the Comex inventories added fuel tothe fire (chart 4). But the fall in inventories were offset by the purchases of generalpublic in silver coins and bars and ETFs.

The industrial uses of silver hardly saw any commendable rise since 2002. It wasonly the rise of investment demand that contributed to the rise of silver prices.


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The industrial demand rise is also attributed to the consumption of silver for use insolar panels used in solar energy extraction, the rise of use of smart appliances and

white goods.

The price movement from $49 point 4. to point 5. $26 is supported by the factthat the global slowdown in the world economy drove down the demand forconsumer goods. The fact that silver prices also were driven by euphorias andpanics are also reflected in the price charts.

Every fall in silver prices has only fuelled the demand growth on investment inform of coins, bars and ETFs.

Rumor had it that the prices of silver had been suppressed by the government since1980 till 2005, for 25 years as an agreement between the US government and the

Hunt Brothers who were barred from trading silver after their infamous cornering ofsilver markets and price manipulation in 1979.

The price movements of silver provided 5 trading opportunities in the futuresmarkets as opposed to physical. No doubt the physical silver too gave good returnsbut were more open to risk with the wild falls in prices too, which could have been

hedged by silver futures on sell side.


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AGAIN WHY COMMODITY FUTURES MARKET ?

`The case studies present in the previous slides show the clear advantagean Investor can gain by using the futures markets to trade and earn

disciplined profits to create wealth.

`The market fundamentals along with the right trade strategy is the righttool in the hand of an investor to trade commodity futures.

` The examples provided in the slides give a clear picture to the pricemoves. A constant daily review of news and world events also help formthe trade strategy for earning profits. It is not necessary that all theavailable moves can be traded. But the opportunity missed in onecommodity also allows us to see the opportunity arising in some other

commodity either on the buy side or sell side.

` All the price charts presented are of international commodities, but thepresence of the same commodities in the domestic exchanges helped catchthe similar trend moves and earn profit.


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Lalit KhatriInvestments Consultant

Get Rich Get Wealthy Live BIG !!!

+91 9967 60 [email protected]

lalit trades investing opportunities in commodity markets

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