Commodity trading has emerged as an attractive and lucrative option for financial market participants in the last few years. Most stock market trading providers offer commodity broking as well. Initially, the Government of India, in early 2003 gave permission to four entities to set-up nation-wide multi-commodity exchanges. Commodity Trading in India has come a long way since. When the domestic electronic trading started, only futures were allowed to trade. Now, commodity trading in India consists of futures and options. Popular commodities on local commodity exchanges include Gold, Silver, Crude Oil, Copper and a few agricultural commodities.
Investing in commodities has a long history. Organized trading on an exchange started in 1848 with the start of the Chicago Board of Trade (CBOT). India also had a functional commodity market as evidenced by the constitution of the Bombay Cotton Trade Association in the year 1875. India had a vibrant futures market in commodities till it was discontinued in the mid 1960’s. While commodities offer a fantastic avenue to allocate your capital in the modern financial market trading, it is important to keep in mind a few factors for benefiting out of this asset class in totality.
Pay Attention To Margin: Commodity trading in India primarily consists of futures. Futures contracts are legal agreements to buy or sell a commodity like Gold, Silver, Copper, Chana etc on a specific date or during a specific month. However, to trade futures, you will be required to pay Minimum margin requirements which represent a tiny percentage of a contract’s total value.
Supply and demand: Commodities are driven by short term fluctuations in demand and supply. It is important to pay attention to actual demand-supply dynamics when analyzing the real-time price action in commodities. The latest tumble in crude oil prices, which fell to -37.63 for WTI variety is a case in point. Oil fell into negative zone because lack of storage capacity as prices extended a massive slide on global economic concerns.
Watch Global cues: Global cues impact the prices of not just metals and energy futures but also important agricultural commodities like edible oils and spices given the heavy reliance of India on foreign trade in these commodities. In this case, apart from tracking the local consumption patterns and weather and harvest related news, production trends in other major producing and consuming countries also have an impact on the prices.
Pay attention to domestic factors: For select agricultural commodities, India is the largest producer as well as a consumer. For effectively understanding the price dynamics of such counters, one has to keep a close track of daily arrivals in major mandies, weather patterns and government policies. The government announces minimum support prices for all major food-grains in the country. The trends in these prices clubbed with weather affect the output of these commodities.
Understand currency dynamics: Currency markets inherently affect global commodity prices and have a ripple effect on local commodities too. US Dollar influences all major commodities globally as they are priced in the dollar. US dollar also affects the exchange rate of Indian Rupee, thereby having an impact on commodities like Gold, Copper, Crude oil etc on the local exchanges. A sharp depreciation in the value of the Rupee tends to push up the prices of these commodities in India.
Global economic trends: Global economic growth trends tend to weigh on industrial commodities. This is the primary reason why global Copper prices tanked to three years low in March 2020. The International Monetary Fund projected a negative 3% global growth for 2020, stressing that global markets were hurtling toward the worst recession since the Great Depression on the coronavirus pandemic.
Commodity trading and stock market trading are similar but due to the financial leverage provided to traders by the exchange, commodity futures are a substantially risky affair. However, with proper risk management and an efficient handling of trades, commodities can turn out to be a profitable venture. Commodity brokers tend to provide useful insights about the price trends and the likely action in the market. Such research can be extremely useful while investing in commodities. However, allocation of capital towards commodity trading needs to be kept strictly in tune with your overall financial appetite and long term financial goals. Read More: How Does Commodity Market Work?