India is one of the largest consumers—and producers—of several commodities, particularly precious metals and agri-based ones. It is thus one of the major Asian economies to influence global price movements. Investors, traders, hedgers and fund houses have always dabbled in commodities, either to expand their trading portfolio or to use it as a hedge against inflation.
The dynamics of trading at India’s commodity markets have changed in recent years. Average daily trading volumes have fallen from a peak of about Rs 75,000 crore in late 2012 to about Rs 25,000 crore today. With deterrents like a commodity transaction tax and weak global demand, expect challenging times this year.
At the start of 2014, optimism was at its peak as many felt that the effects of the 2008 financial crisis were over. However, 2015 has started with an atmosphere of dismay [due to falling crude] and the global economy is in a fragile state. In recent months, global commodity trends have been rocked by a whole range of factors, including geopolitical pressures, changing growth dynamics for key global economies and divergent policies of global central banks.
In previous decades we saw the ‘supercycle’ of commodities [from the late 1990s till the 2008 financial crisis] when annual prices of most commodities soared, fuelled by rising demand from Bric economies, the US and eastern Europe. But, since 2012, commodities have been largely out of favour against the backdrop of slowing economic growth in China and other economies, improved supplies and, of late, a strengthening dollar.
In my view, the supercycle of commodities, at this stage, is over. Uncertainties regarding growth of several economies continue to build and the demand for several commodities has waned.
But that does not mean commodities need to be ignored. Demand could pick up in a year’s time. The monetary policies of central bankers will be critical in determining future trends. Further, these policies will lead to raised expectations about economic growth.
The US is the only economy in the developed world that is showing signs of growth; with crude down, disposable incomes are rising. The US Federal Reserve has started to tighten its monetary policy, which has aided the strengthening of the dollar, so dollar-denominated commodities will follow a negative path.
On the other hand, economies in Europe and Asia continue to struggle, forcing their central banks to ease monetary policies. This will lead to the build-up of some positive sentiment regarding these economies. The impact will be a tussle between global currencies and trading sentiments. The uncertainties surrounding Greece, and conflicts in Russia-Ukraine and the Middle East are ‘black swan’ events, whose impact is yet to be fully felt.
A few commodities, especially gold, have been negatively correlated with economic growth. Whenever an economy is not faring well, precious metals like gold and silver emerge as strong and safe assets, while offering investors the benefits of diversification in their portfolio. Though gold is off its heady heights of 2011, I suggest investors continue to stay with gold, regardless of specific price points. Here’s a closer look at the major commodities.
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(This story appears in the 06 February, 2015 issue of Forbes India. To visit our Archives, click here.)
Commodity prices have been falling for four years. Had this article been written in 2011 it would have been considered prescient, but now in 2015, experienced investors will consider it a contrary indicator. I started buying commodity stocks last week as I believe the bottom has arrived. Bear markets usually end when amateurs proclaim that all hope is lost. The reason is that smart money waits for amateurs to finish selling so they can be confident that other smart (big) money already sold long before so risk of continued decline is low.on Feb 3, 2015