Demystifying the commodities Markets

I have been in conversation with my colleagues and they wanted me to share my past experience with the commodities.

Commodities as a separate asset class has immense potential for the market savvy investors, arbitrageurs and speculators. Out of the three the market is more of speculation and arbitrage, which also ultimately leads to speculation in one way or the other.  Except Gold, hardly any commodities are used for investment. Off late the retail investors allowed entering in the Indian commodities market, which has been dominated by the big corporate, trading houses and industries by large.

Although commodities are easy to understand than equities, but the pricing mechanism is far difficult for commodities to analyze. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. But in uncertain times commodities can make people crazy leaving them naked.

Just to put things in prospective, In terms of volatility Natural Gas is roughly 12-14 times more volatile than real estates were as Crude oil is 7-8 times.

Despite us being the biggest consumer of gold, India has simply remained a price taker as far as Gold prices and many other commodities concerned.

While concerning towards the agro commodities they are never faint hearted, because of the weather the futures on them leads to hair-raising and turns out in to a casino. The truth is that agro commodities are all about weather, in almost all crops, acreage and yields have maxed out. Demand is also well anticipated and priced in. When it comes to weather it is a matter of chance and Chance = Casino.

The three major exchanges for commodities are:

  • The National Commodity and Derivative Exchange,
  • The Multi Commodity Exchange of India Ltd
  • The National Multi Commodity Exchange of India Ltd.

All of them as Electronic trading and national presence,

The exchanges are regulated by the FMC (Forward Market Commission). The agriculture ministry now and then with full rights intervenes in the commodities market and has power to ban futures on commodities as they wish. This led to price manipulation rather than price discovery, so the Indian commodities market is like a puppet in the hands of government, where price discovery is a question mark?

(Commodities market is very vast; these are just few extracts which came across in my very short period of working, would learn and explore more)

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