Finally, the country has managed to record a 6.7 percent growth in financial year 2008-09, despite the global economy still in the throes of a deep recession. This has been vindicated by the official figures released recently. This growth rate, though, much lower than the 9 percent rate that we have been clocking for the previous four years, is nonetheless, well above the 6 percent growth that was being projected by some analysts. Some prophets had even predicted only a 5% growth in the last financial year. The Central Statistical Organization had pegged the GDP growth rate at 7.1 percent.
The actual growth rate is certainly in the range that the RBI had projected: 6 to 5.7 %. Our Prime Minister Dr. Manmohan Singh too had been emphasizing that the growth rate would be in the range of 6.5 to 7. That is precisely what has happened.
In a way, this growth has been somewhat unexpected. It has largely been possible by the strong 5.8 % growth in the last quarter of the financial year. The reasons for this have been the effects of huge Government spending on social programmes and construction, pumping liquidity into the market through special packages and by lowering of interest rates. Government consumption too increased by 22 percent.
The most encouraging news is the performance of the core sector which has sent clear signals of an economic recovery. In April 2009 growth rate in the core sector of infrastructure doubled to 4.3 percent, against 2.3% in the same month last year when the economy was booming. The output of cement in April went up by 11.7% compared to 6.9% in the same month last year. Steel grew by 1.6 percent against a decline of 0.6 % in April last year. Coal production grew at an impressive 13.2 percent compared to 10.4 % in the corresponding period last year. So was the case with electricity generation which jumped up by 6% in April against 1.4 % in the same month, last year.
Not less important is the increase in the collection of direct taxes by 16.88 % in May this year. In fact the collections have shown a positive growth since February this year. This will help the Government to keep the fiscal deficit under control, which could well cross 5% of the GDP against the limit of 2.5 % fixed earlier. The deficit could well be about 10 % if the state budgets are also taken into account. The actual position in this regard will, however, be known when the Finance Minister presents the budget next month. May month’s collection figures are particularly encouraging as there had been a shortfall just a month earlier.
As a result of this economic scenario, coupled with the installation of a stable Government at the centre, the financial market is also jubilant. The stocks are rising and the sensex is hovering in the 15,000 area, double than what it was less than 6 months ago. Mutual Funds too are, as a consequence, looking up.
The picture certainly would have been much better, had we not slowed down in two important sectors: manufacturing and agriculture. A sluggish manufacturing sector, which grew at just 2.4 percent during 2008-09 against 8.2% in the previous financial year, was a dampener. Similarly, agriculture, which accounts for 20 % of the country’s GDP, recorded just 1.6 % growth in the last financial year against 4.9 % in the previous financial year.
What came as a booster was the growth in the service sector: 13 % growth in the community services, 9% in transport and communications sector and a 7.8% growth in financial and other service sector. All this happened at a time when the US economy contracted by an annualized rate of 6.2 % and the Japanese economy by 12.7 %. This only proves the resilience of Indian economy. To some extent it is also due to the fact that Indian economy is more inward looking as it opened up only after 1991. It thus depends more on the domestic demand. In sectors where it looks more on the foreign markets like the textiles, the effect of global meltdown has been more pronounced. The country recorded a 33% fall in exports in March this year, leading to fall in incomes and unemployment in this sector.
President Pratiba Devi Singh Patil’s recent address to the joint sitting of the two houses of Parliament has now laid the future roadmap for the Government. It aims at pushing ahead with the economic reforms, pursuing the disinvestment and promoting Foreign Direct Investment which will also take care of the financial constraints of the Government. It also envisages increased public spending. But while doing so, care will be taken of fiscal prudence so that the widening gap in fiscal deficit is kept in check.
Liquidity in the banking sector will also be improved to make way for better access to funds by the stake holders. The Reserve Bank of India has already asked the Government for a comprehensive review of the interest rate regime to nudge the banks into reducing their lending rates which they are reluctant to do. The Finance Minister Mr. Pranab Mukherjee too has clearly pointed out to the banks that they have not so far adequately reflected in their lending rates, the reduction in key rates by the RBI. But they have now agreed to take a fresh look at the issue.
Fortunately, inflation too is under control which provides additional leg space to the Government to take fiscal and monetary measures to push up growth. The current financial year will not be without challenges and the growth rate may continue to be around the existing level. The Prime Minister told the Parliament the other day that he was confident that the country would record at least 7% growth in the current fiscal as well. But if all work together, it is possible to raise it to 8-9 % “even when the world grows at a lower rate” the Prime Minister said. These are words of satisfaction indeed. A high rate of 35% of our GDP being the savings determines the money that can be deployed for development works, though heavy public spending does carry a cost in terms of increasing fiscal deficit which has already crossed 6.2 %.
The larger picture that emerges thus is of hope, confidence and optimism on the economic front. (Courtesy: Press Information Bureau)
Tuesday, 23 June 2009
Sunday, 21 June 2009
IMF Gold Sale: WGC welcomes US approval
The World Gold Council (WGC), the apex global body on gold, has welcomed the US Congress approval to the gold sale plan from the International Monetary Fund (IMF).
Last week, the US House of Representatives approved an agreement to allow US members of the IMF board to agree the proposed $13 billion sale of 400 tonnes of IMF gold to shore up its finances.
In a statement, Aram Shishmanian, the WGC's chief executive welcomed the US Congress approval to the IMF gold sale plan. "We are pleased to see that the IMF's plan to sell gold in a structured and non-disruptive manner has gone through due political process without problem, which is a credit to the responsible behaviour of all parties involved in the process," said the statement.
WGC said the IMF gold sale will not constitute any net addition to the amount of gold the market is already expecting from official sector sources as a whole, and therefore we anticipate zero market impact. We believe this announcement, if anything, will lead to positive sentiment among market participants as it clarifies that there will be no net addition to overall gold supply.
Shishmanian said: "In these times of financial instability, gold's universal role as protector of wealth has come to the fore, not least as a crucial part of reserve asset portfolios. The fact that these sales will effectively rescue the IMF from a difficult situation regarding its own finances is proof of gold's unique investment characteristics, long-recognised by central bankers and institutional and retail investors alike."
Given the IMF's status as "a lender of last resort", the WGC believes it is imperative that the organisation continues to hold large gold reserves and acknowledges the IMF's public declarations that: "The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies."
The US approval to the IMF gold sale plan has been tied to the Military Supplemental Bill which covered additional funding for the Iraq and Afghanistan conflicts for the U.S forces.
While the bill itself does not specifically tie the IMF sales to an orderly sales programme, the IMF has stated publicly that any such sales should be made in co-ordination with current and future Central Bank Gold Sales Agreements whereby signatories have to agree to limit total annual sales to less than a specific volume (currently 500 tonnes).
Last week, the US House of Representatives approved an agreement to allow US members of the IMF board to agree the proposed $13 billion sale of 400 tonnes of IMF gold to shore up its finances.
In a statement, Aram Shishmanian, the WGC's chief executive welcomed the US Congress approval to the IMF gold sale plan. "We are pleased to see that the IMF's plan to sell gold in a structured and non-disruptive manner has gone through due political process without problem, which is a credit to the responsible behaviour of all parties involved in the process," said the statement.
WGC said the IMF gold sale will not constitute any net addition to the amount of gold the market is already expecting from official sector sources as a whole, and therefore we anticipate zero market impact. We believe this announcement, if anything, will lead to positive sentiment among market participants as it clarifies that there will be no net addition to overall gold supply.
Shishmanian said: "In these times of financial instability, gold's universal role as protector of wealth has come to the fore, not least as a crucial part of reserve asset portfolios. The fact that these sales will effectively rescue the IMF from a difficult situation regarding its own finances is proof of gold's unique investment characteristics, long-recognised by central bankers and institutional and retail investors alike."
Given the IMF's status as "a lender of last resort", the WGC believes it is imperative that the organisation continues to hold large gold reserves and acknowledges the IMF's public declarations that: "The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies."
The US approval to the IMF gold sale plan has been tied to the Military Supplemental Bill which covered additional funding for the Iraq and Afghanistan conflicts for the U.S forces.
While the bill itself does not specifically tie the IMF sales to an orderly sales programme, the IMF has stated publicly that any such sales should be made in co-ordination with current and future Central Bank Gold Sales Agreements whereby signatories have to agree to limit total annual sales to less than a specific volume (currently 500 tonnes).
Sunday, 7 June 2009
How many times did IMF sell gold since 1950?
The International Monetary Fund (IMF) holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $8.7 billion) on the basis of historical cost. As of March 31, 2009, the IMF's holdings amounted to $94.8 billion (at then current market prices).
A portion of these holdings were acquired since the Second Amendment of the IMF’s Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tons), with a market value of $11.9 billion as of March 31, 2009. As noted below, this part of the Fund’s gold holdings is not subject to restitution to members.
The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF's gold. Second, all payments of charges (i.e., interest on members' use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970-71. And finally, members could use gold to repay the IMF for credit previously extended.
The IMF's policy on gold today
The Second Amendment to the Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.
The Articles of Agreement now limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member's obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not have the authority to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.
The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.
The IMF's policy on gold is governed by the following principles:
• As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
• The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
• The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
• Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.
How and when the IMF used gold
Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:
• Sales for replenishment (1957-70). The IMF sold gold on several occasions to replenish its holdings of currencies.
• South African gold (1970-71). The IMF sold gold to members in amounts roughly corresponding to those purchased from South Africa during this period.
• Investment in U.S. government securities (1956-72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.
• Auctions and "restitution" sales (1976-80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.
• Off-market transactions in gold (1999-2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative.
Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative.
In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left balance of the IMF's holdings of physical gold unchanged.
Courtesy: Reproduced from the International Monetary Fund web site
A portion of these holdings were acquired since the Second Amendment of the IMF’s Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tons), with a market value of $11.9 billion as of March 31, 2009. As noted below, this part of the Fund’s gold holdings is not subject to restitution to members.
The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF's gold. Second, all payments of charges (i.e., interest on members' use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970-71. And finally, members could use gold to repay the IMF for credit previously extended.
The IMF's policy on gold today
The Second Amendment to the Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.
The Articles of Agreement now limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member's obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not have the authority to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.
The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.
The IMF's policy on gold is governed by the following principles:
• As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.
• The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.
• The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.
• Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.
How and when the IMF used gold
Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:
• Sales for replenishment (1957-70). The IMF sold gold on several occasions to replenish its holdings of currencies.
• South African gold (1970-71). The IMF sold gold to members in amounts roughly corresponding to those purchased from South Africa during this period.
• Investment in U.S. government securities (1956-72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.
• Auctions and "restitution" sales (1976-80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.
• Off-market transactions in gold (1999-2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative.
Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative.
In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left balance of the IMF's holdings of physical gold unchanged.
Courtesy: Reproduced from the International Monetary Fund web site
Making money on agri-commodities uptrend
Global food prices are climbing higher along with energy and precious metals. In May, the Reuters/Jefferies CRB Index, which tracks 19 raw materials including corn, crude oil, and gold, surged by 14 percent — its biggest monthly gain since 1974!
What’s behind this move? Simple: The U.S. government’s massive spending is killing the dollar and setting off inflation. At the same time, China’s massive economy is still growing like crazy. And the insatiable Chinese demand for all kinds of resources looks set to continue despite the global recession.
In last week’s Money and Markets column, I explained how you can trade gold with ETFs. Today we’re going to look at the ways you can play the uptrend in agricultural products — without using futures or options.
Method #1: Buy Individual Agricultural Companies
One way to invest in rising food prices is to buy the stocks of companies in the “agribusiness” sector. You’ve probably heard of companies like Archer Daniels Midland (ADM), John Deere (DE), Monsanto (MON), and Tyson Foods (TSN).
Of course, individual stock picking takes a lot of time and research. What if you just want to get broad exposure to the whole group?
Method #2: Buy Agribusiness Stock-Based ETFs!
For instance, take a look at Market Vectors Agribusiness ETF. The ticker symbol is MOO, and it has all the companies listed above plus a few dozen more — including many non-U.S. stocks that are hard to access otherwise. PowerShares Global Agriculture (PAGG) is another ETF covering this space. Either MOO or PAGG will give you a good cross-section of agriculture-oriented stocks from around the world.
Of course, stock based ETFs — while great — only provide “indirect” exposure to the underlying grains and agricultural products. What if you want direct access to the commodities themselves?
Method #3: Use Commodity-Focused ETFs and ETNs
You can now buy your way into the grain markets just as easily as you buy a stock — without the stress of leveraged futures and options. For instance, PowerShares DB Agriculture Fund (DBA) tracks an index of four key markets: Corn, wheat, soybeans and sugar. With these in your pocket, you’ll be ready to profit as inflation sends worldwide food prices through the roof.
The iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN (JJA) is similar to DBA but is a little more diversified, adding coffee, cotton and soybean oil to the mix.
The last broad-based, commodities ETF I want to discuss today is Elements Linked To Rogers International Commodity Index — Agriculture Total Return (RJA).
RJA follows an index of 20 agricultural commodities developed by legendary investor Jim Rogers. It includes all the major markets plus several smaller ones: Canola, orange juice, oats, rubber, live cattle, lumber, cocoa, and more.
What about Single-Market Agriculture Funds?
If you want to zero in on one or more individual commodity markets, such as coffee or sugar, there are now easy ways to do that, too. Several firms offer ETF-like products that do this for you. If it’s coffee you want, iPath has an ETN that tracks java prices. The ticker is JO. There are others for livestock, cocoa, and sugar.
However, I suggest that most people stay away from individual commodities, for two reasons:
First, the risk is very high. Unless you’re very confident in what you’re doing, or you’re getting the guidance of a bona fide commodities expert, you’re probably better off leaving these laser-focused investments out of your portfolio.
Second, these funds are fairly new and tend to have low trading volumes, which implies they are not very liquid. That means you may get hurt by higher transaction costs.
In other words, it’s far better to follow the major trends with one of the more diversified, agriculture securities I’ve mentioned earlier.
Another thing to keep in mind is that many of the commodity-tracking vehicles are ETNs, not ETFs. That means you are exposed to the issuer’s credit default risk. (See my February 6, 2009, Money and Markets column to learn why ETNs may be riskier than they look.)
I’m not trying to scare you away from ETNs, of course. Far from it — I use them myself. I just want you to be aware of what you’re getting into.
Bottom line: If we’re entering a major inflationary trend, food prices could go much, much higher. And the exchange-traded products that hold commodities and/or agricultural companies could shoot up as well.
By Ron Rowland
What’s behind this move? Simple: The U.S. government’s massive spending is killing the dollar and setting off inflation. At the same time, China’s massive economy is still growing like crazy. And the insatiable Chinese demand for all kinds of resources looks set to continue despite the global recession.
In last week’s Money and Markets column, I explained how you can trade gold with ETFs. Today we’re going to look at the ways you can play the uptrend in agricultural products — without using futures or options.
Method #1: Buy Individual Agricultural Companies
One way to invest in rising food prices is to buy the stocks of companies in the “agribusiness” sector. You’ve probably heard of companies like Archer Daniels Midland (ADM), John Deere (DE), Monsanto (MON), and Tyson Foods (TSN).
Of course, individual stock picking takes a lot of time and research. What if you just want to get broad exposure to the whole group?
Method #2: Buy Agribusiness Stock-Based ETFs!
For instance, take a look at Market Vectors Agribusiness ETF. The ticker symbol is MOO, and it has all the companies listed above plus a few dozen more — including many non-U.S. stocks that are hard to access otherwise. PowerShares Global Agriculture (PAGG) is another ETF covering this space. Either MOO or PAGG will give you a good cross-section of agriculture-oriented stocks from around the world.
Of course, stock based ETFs — while great — only provide “indirect” exposure to the underlying grains and agricultural products. What if you want direct access to the commodities themselves?
Method #3: Use Commodity-Focused ETFs and ETNs
You can now buy your way into the grain markets just as easily as you buy a stock — without the stress of leveraged futures and options. For instance, PowerShares DB Agriculture Fund (DBA) tracks an index of four key markets: Corn, wheat, soybeans and sugar. With these in your pocket, you’ll be ready to profit as inflation sends worldwide food prices through the roof.
The iPath Dow Jones-AIG Agriculture Total Return Sub-Index ETN (JJA) is similar to DBA but is a little more diversified, adding coffee, cotton and soybean oil to the mix.
The last broad-based, commodities ETF I want to discuss today is Elements Linked To Rogers International Commodity Index — Agriculture Total Return (RJA).
RJA follows an index of 20 agricultural commodities developed by legendary investor Jim Rogers. It includes all the major markets plus several smaller ones: Canola, orange juice, oats, rubber, live cattle, lumber, cocoa, and more.
What about Single-Market Agriculture Funds?
If you want to zero in on one or more individual commodity markets, such as coffee or sugar, there are now easy ways to do that, too. Several firms offer ETF-like products that do this for you. If it’s coffee you want, iPath has an ETN that tracks java prices. The ticker is JO. There are others for livestock, cocoa, and sugar.
However, I suggest that most people stay away from individual commodities, for two reasons:
First, the risk is very high. Unless you’re very confident in what you’re doing, or you’re getting the guidance of a bona fide commodities expert, you’re probably better off leaving these laser-focused investments out of your portfolio.
Second, these funds are fairly new and tend to have low trading volumes, which implies they are not very liquid. That means you may get hurt by higher transaction costs.
In other words, it’s far better to follow the major trends with one of the more diversified, agriculture securities I’ve mentioned earlier.
Another thing to keep in mind is that many of the commodity-tracking vehicles are ETNs, not ETFs. That means you are exposed to the issuer’s credit default risk. (See my February 6, 2009, Money and Markets column to learn why ETNs may be riskier than they look.)
I’m not trying to scare you away from ETNs, of course. Far from it — I use them myself. I just want you to be aware of what you’re getting into.
Bottom line: If we’re entering a major inflationary trend, food prices could go much, much higher. And the exchange-traded products that hold commodities and/or agricultural companies could shoot up as well.
By Ron Rowland
Commodity Trends: Gold, oil, equities lent support
The clear winner among commodities in recent weeks is crude oil and on Friday it hit a seven-month high above $70 per barrel on Friday after much better-than-expected US employment data pushed stock markets higher. A government report said US employers cut 345,000 jobs last month, the fewest since September and far less than forecast, suggesting the economy’s severe weakness was diminishing. But profit booking send oil prices down to $68 levels.
Even though food items became dearer because of the base effect, the wholesale price index (WPI) measured annual inflation for the week ended May 23 dropped to 0.48%. Fruits, vegetables, pulses and cereals became costlier over the week, while fuel index and index for manufactured items remained unchanged. But agri-analysts suggest with normal monsoon in offing, inflation in food items is likely to remain soft.
Reversing its early weak trends, the Bombay Stock Exchange benchmark Sensex regained the 15,000 point level after nine months by rising nearly 138 points after the government unveiled its reforms plan to tackle the economic slowdown.
Precious Metals
Gold prices traded range bound in the last week. After witnessing rise in past few weeks prices failed to move higher on account of profit booking. But due to high investment demand and weakness in dollar prices had limited downside. Silver prices have witnessed relatively larger gains in recent times. Strong investment by ETFs is the prominent reason for this rise. It is expected that investment demand for silver in 2009 could comprise 20%- 25% of total demand in 2009, as compared to 7% in 2008. The holdings of the iShares Silver Trust ETF reached to 8,605.43 tonnes on June 3. Rise in oil prices have also played key role in supporting gold. Meanwhile dollar lost ground after ECB kept interest rates unchanged and ECB President said that Eurozone economy is expected to recover in the second half of this year.
The outlook for gold looks largely dependent on the path of the dollar over the coming months as a trillion-dollar-plus U.S. deficit and the impact of unorthodox monetary policy to boost lending, could stoke inflation greatly. Further, investors are worried about the imminent collapse of the dollar which would have severe ramifications across the board. Bullion's link to the dollar is a well-established one, with the metal traditionally used as a hedge against weakness in the U.S. currency. A softer dollar also makes dollar-priced gold cheaper for holders of other currencies. Longer-term inflation worries will continue to shape demand for gold.
The overall health of the global economy will stay in focus. Spot Gold can find crucial support in the zone of $960-948 levels, whereas major resistance zone is seen between $985 and $1000 MCX August Gold can face support around Rs.14730/14600 levels, whereas resistance is seen at Rs. 14975/15110 per 10 gram.
Crude Oil
Crude Oil prices extended its weekly gain for third week in a row, as weakening dollar and firm global equity markets boosted market sentiments. Oil prices reached to seven month high despite bearish inventory data, as better than expected economic data from US bolstered oil prices. Oil prices touched a high of $69.52 on Thursday. US Energy department said that, Crude Oil inventory for the week ended May 29 increased by 2.9Mbbl to 366Mbbl, against the expected decline of 1.5Mbbl.Distillates stocks also increased by 1.6Mbbl to 150Mbbl and gasoline stocks decreased by 0.2Mbbl to 203.2Mbbl. US weekly employment data showed that number of US workers filing for new claims for jobless benefits declined for third straight week. Market sentiment remained buoyant on hopes for economic recovery, which could help to revive ailing energy demand.
Meanwhile dollar continued to weaken against major currencies on reduction in demand for safer currencies, helping oil prices to move higher. Economic data is also showing improvement, leading to rise in expectation of economic recovery during the second half of this year. We believe that rise in oil prices is not backed by demand fundamentals as demand for oil is still weak and inventories are also at substantially higher levels. After rising sharply in the last week oil prices can witness profit booking and can find difficult to trade above $70 per barrel. We expect NYMEX crude to meet with resistance around $72.30 levels. On the downside, we expect the prices to be strongly supported around the $63 levels. MCX June Crude Oil futures have support at Rs. 3150/2980 and resistance is seen at Rs. 3350/3490 per barrel.
Rubber
Weak to steady trend was visible in the rubber market. But Futures prices hovered around Rs 100 with some weakness seen in the early days of the week that led RSS 4 June to close at Rs 98.69. Spot rubber marked lacked quantity buyers from major consuming industries. With difference in Indian and global prices of RSS$ at Rs 18-20 per kg, imports are turning attractive while exports targets are difficult to achieve.
The total exports during April-May fell 88 per cent, compared with the same period last year. Just 818 tonnes were shipped during the two months against 6,849 tonnes in the corresponding period of the previous year. Local price of RSS-4 grade is being quoted at Rs 100 a kg while the global price is at Rs 82 a kg.
Towards weekend Spot rubber turned better on Fridayon covering purchases following the gains in futures on National Multi Commodity Exchange. Major manufacturers were buyers on sheet rubber at Rs 99 a kg while the grade firmed up to Rs 100 from Rs 99 a kg on supply concerns. The trend was mixed.
The June futures for RSS 4 improved to Rs 100.30 (99.77), July to Rs 98.64 (97.76), August to Rs 95.91 (95.29) and September to Rs 93.40 (92.50) a kg on NMCE.
Globally,rubber futures remained weak on speculation that higher prices may slow purchases by the automobile industry although rising crude oil prices are supportive for rubber. Speculation that demand in China would increase on growing car sales had led to 25% growth in global rubber prices this year.
Base Metals
In the last few days, base metals have rallied sharply on the back of a weaker dollar and buoyant equities. Financial markets across the globe were hoping for a faster recovery from the economic crisis. But weak data now and then reminds that the crisis is still ongoing. Hence, we feel that the current rally in base metals may not be sustainable as it is not on the basis of improvement in demand but mainly due to positive cues from the equity markets and a weakness in the dollar. We feel that base metal prices could continue to face pressure on the downside prior to the weekend.
The release of the not so positive US economic data could dampen sentiments ahead of the weekend. Hence, we recommend investors to trade on a cautious note. Overall we feel that Copper prices could head lower in the medium term but the dips could be relatively short-lived as lower prices attract production cutbacks and strategic buying by the SRB. However, we expect real recovery in demand to come in by the end of this year as the brightest aspect for the base metals market is the stimulus packages. Since the Chinese stimulus package of $586 billion is infrastructure intensive, we feel that demand for copper could rise tremendously in the long-term.
Pepper
Pepper market this week was marked by high volatility. Towards weekend India pepper futures climbed up as concerns on slackening demand was offset by fresh domestic buying. Both bulls and bears were active. June contract was up by Rs 52 a quintal on NCDEX to close at Rs12,465. July and August moved up by Rs 28 and Rs 50 respectively to close at Rs12,587 and Rs 12,765 a quintal.
The sentiments are still weak on lacklustre overseas and domestic demand. .Prices have fallen close to 6 percent this week from their May 4th high of 13,220 rupees.
Overseas sales have taken a hit as Vietnam, the largest producer, continues to sell at a discount to Indian rates in the overseas markets Meanwhile, overseas reports saying that Vietnam has hiked its prices by $50-75 a tonne following enquiries reaching there from buyers from various markets including India, have also contributed to the upward swing, they said.
Pepper prices (NCDEX June 09 Contract) closed at Rs.12,469/qtl up by Rs.56/quintal as compared to Thursday’s close of Rs. 12,413/qtl.
Pepper futures after making a recent high of Rs.12,581/qtl are trading in rangebound manner tracking sluggish trades at the domestic market. Prices are likely to be steady with a weak bias in the coming weak.
Soybean
NCDEX July Soybean futures moved in a narrow range of Rs 2602.50-2659 per quintal during the last week amid lackluster demand. Arrivals of soybean were steady around 60,000-65,000 bags per day during the last week in major mandis of Madhya Pradesh. Rains play a crucial role for soybean planting in all the major soy growing areas in India. Soybean plantation is depending upon the arrival of monsoon. USDA’s weekly export figures released on Thursday, it shows negative figures for soybean due to China’s cancellation of 1,12,600 metric tonnes of soybean.
Net export sales of soybean were 36,500 tonnes. Sales need to average just 1,000 tonnes each week to reach the USDA forecast. Net export sales of Meal were 1,59,700 tonnes. Sales need to average 77,000 tonnes each week to reach the USDA forecast. In the coming week, prices are expected to move slightly up due to lower stock of soybean and strong movement in soybean and soy meal futures at CBOT and soybean plantation may be delay in Maharashtra due to slow pace of monsoon. NCDEX July soybean has support at 2555/2520 and resistance is seen at 2680/2720 levels in this week.
Guar Seed
Guar prices have corrected by almost 11% in the past 4-5 weeks as weather department’s first long range forecast (in April) had predicted that the monsoon will be near normal in the coming season (June –Sept). However, during the last week, prices settled slightly higher at Rs. per qt . Guar is the rain fed crop and the first long range weather forecast always plays a crucial role in determining the trend in Guar prices. T
he second long range forecast which would released by mid June would decide the further trend in Guar complex in the short term. Apart from monsoon, one more factor which would decide the further trend in Guar is the sowing acreage. It is expected that in the coming season farmers might shift to the other remunerative crop like cotton, which had fetched good returns in the past 3-4 years. Thus, despite normal monsoon, prices will not fall much from the current levels. Sowing of Guari which normally starts from May 15 & continues till June 15, has not yet started in the current season. Actual sowing of guar (30% gum content) crop would take place in mid July.
Guar prices are likely to trade in the range of Rs. 1650-1750 per qtl till the expiry of June contract. This is because the expectations of decline in acreage would limit the downside whereas the good monsoon progress would cap the gains at higher levels. Monsoon will play a major role in deciding the trend in Guar complex in the long term and thus a close watch is necessary during the monsoon season. IMD would give its 2nd long Range weather forecast by mid June. This would decide the further trend in Guar complex.
Wheat
In US CBOT, wheat futures are volatile and up on fund buying while in India wheat futures have been bearish on rising stock concerns. Currently, government agencies have procured huge stocks in the domestic markets due to a record production of wheat. The only factor which is supporting the Indian Wheat prices is the rising international prices.
Fund buying, stabilizing equities, and gains in crude oil and soybeans helped support the bounce in CBOT during middle of the week although fundamentals weren’t supportive of a bounce. On Thursday, commodity funds bought an estimated 5000 contracts.
Keeping aside the huge stocks in the global markets, the bullish factors which is supporting the international wheat prices are deterioration of the US winter wheat crop (45% in good-to-excellent condition as of May 24, -3 pts from the prior week) and delayed spring wheat plantings (79% as of May 24 vs. the 5-yr avg of 95%. Late on Monday USDA placed the U.S. spring-wheat crop 89% planted vs. 5-year average of 98%. Wheat prices may trade in range of 1080-11150 levels.
Even though food items became dearer because of the base effect, the wholesale price index (WPI) measured annual inflation for the week ended May 23 dropped to 0.48%. Fruits, vegetables, pulses and cereals became costlier over the week, while fuel index and index for manufactured items remained unchanged. But agri-analysts suggest with normal monsoon in offing, inflation in food items is likely to remain soft.
Reversing its early weak trends, the Bombay Stock Exchange benchmark Sensex regained the 15,000 point level after nine months by rising nearly 138 points after the government unveiled its reforms plan to tackle the economic slowdown.
Precious Metals
Gold prices traded range bound in the last week. After witnessing rise in past few weeks prices failed to move higher on account of profit booking. But due to high investment demand and weakness in dollar prices had limited downside. Silver prices have witnessed relatively larger gains in recent times. Strong investment by ETFs is the prominent reason for this rise. It is expected that investment demand for silver in 2009 could comprise 20%- 25% of total demand in 2009, as compared to 7% in 2008. The holdings of the iShares Silver Trust ETF reached to 8,605.43 tonnes on June 3. Rise in oil prices have also played key role in supporting gold. Meanwhile dollar lost ground after ECB kept interest rates unchanged and ECB President said that Eurozone economy is expected to recover in the second half of this year.
The outlook for gold looks largely dependent on the path of the dollar over the coming months as a trillion-dollar-plus U.S. deficit and the impact of unorthodox monetary policy to boost lending, could stoke inflation greatly. Further, investors are worried about the imminent collapse of the dollar which would have severe ramifications across the board. Bullion's link to the dollar is a well-established one, with the metal traditionally used as a hedge against weakness in the U.S. currency. A softer dollar also makes dollar-priced gold cheaper for holders of other currencies. Longer-term inflation worries will continue to shape demand for gold.
The overall health of the global economy will stay in focus. Spot Gold can find crucial support in the zone of $960-948 levels, whereas major resistance zone is seen between $985 and $1000 MCX August Gold can face support around Rs.14730/14600 levels, whereas resistance is seen at Rs. 14975/15110 per 10 gram.
Crude Oil
Crude Oil prices extended its weekly gain for third week in a row, as weakening dollar and firm global equity markets boosted market sentiments. Oil prices reached to seven month high despite bearish inventory data, as better than expected economic data from US bolstered oil prices. Oil prices touched a high of $69.52 on Thursday. US Energy department said that, Crude Oil inventory for the week ended May 29 increased by 2.9Mbbl to 366Mbbl, against the expected decline of 1.5Mbbl.Distillates stocks also increased by 1.6Mbbl to 150Mbbl and gasoline stocks decreased by 0.2Mbbl to 203.2Mbbl. US weekly employment data showed that number of US workers filing for new claims for jobless benefits declined for third straight week. Market sentiment remained buoyant on hopes for economic recovery, which could help to revive ailing energy demand.
Meanwhile dollar continued to weaken against major currencies on reduction in demand for safer currencies, helping oil prices to move higher. Economic data is also showing improvement, leading to rise in expectation of economic recovery during the second half of this year. We believe that rise in oil prices is not backed by demand fundamentals as demand for oil is still weak and inventories are also at substantially higher levels. After rising sharply in the last week oil prices can witness profit booking and can find difficult to trade above $70 per barrel. We expect NYMEX crude to meet with resistance around $72.30 levels. On the downside, we expect the prices to be strongly supported around the $63 levels. MCX June Crude Oil futures have support at Rs. 3150/2980 and resistance is seen at Rs. 3350/3490 per barrel.
Rubber
Weak to steady trend was visible in the rubber market. But Futures prices hovered around Rs 100 with some weakness seen in the early days of the week that led RSS 4 June to close at Rs 98.69. Spot rubber marked lacked quantity buyers from major consuming industries. With difference in Indian and global prices of RSS$ at Rs 18-20 per kg, imports are turning attractive while exports targets are difficult to achieve.
The total exports during April-May fell 88 per cent, compared with the same period last year. Just 818 tonnes were shipped during the two months against 6,849 tonnes in the corresponding period of the previous year. Local price of RSS-4 grade is being quoted at Rs 100 a kg while the global price is at Rs 82 a kg.
Towards weekend Spot rubber turned better on Fridayon covering purchases following the gains in futures on National Multi Commodity Exchange. Major manufacturers were buyers on sheet rubber at Rs 99 a kg while the grade firmed up to Rs 100 from Rs 99 a kg on supply concerns. The trend was mixed.
The June futures for RSS 4 improved to Rs 100.30 (99.77), July to Rs 98.64 (97.76), August to Rs 95.91 (95.29) and September to Rs 93.40 (92.50) a kg on NMCE.
Globally,rubber futures remained weak on speculation that higher prices may slow purchases by the automobile industry although rising crude oil prices are supportive for rubber. Speculation that demand in China would increase on growing car sales had led to 25% growth in global rubber prices this year.
Base Metals
In the last few days, base metals have rallied sharply on the back of a weaker dollar and buoyant equities. Financial markets across the globe were hoping for a faster recovery from the economic crisis. But weak data now and then reminds that the crisis is still ongoing. Hence, we feel that the current rally in base metals may not be sustainable as it is not on the basis of improvement in demand but mainly due to positive cues from the equity markets and a weakness in the dollar. We feel that base metal prices could continue to face pressure on the downside prior to the weekend.
The release of the not so positive US economic data could dampen sentiments ahead of the weekend. Hence, we recommend investors to trade on a cautious note. Overall we feel that Copper prices could head lower in the medium term but the dips could be relatively short-lived as lower prices attract production cutbacks and strategic buying by the SRB. However, we expect real recovery in demand to come in by the end of this year as the brightest aspect for the base metals market is the stimulus packages. Since the Chinese stimulus package of $586 billion is infrastructure intensive, we feel that demand for copper could rise tremendously in the long-term.
Pepper
Pepper market this week was marked by high volatility. Towards weekend India pepper futures climbed up as concerns on slackening demand was offset by fresh domestic buying. Both bulls and bears were active. June contract was up by Rs 52 a quintal on NCDEX to close at Rs12,465. July and August moved up by Rs 28 and Rs 50 respectively to close at Rs12,587 and Rs 12,765 a quintal.
The sentiments are still weak on lacklustre overseas and domestic demand. .Prices have fallen close to 6 percent this week from their May 4th high of 13,220 rupees.
Overseas sales have taken a hit as Vietnam, the largest producer, continues to sell at a discount to Indian rates in the overseas markets Meanwhile, overseas reports saying that Vietnam has hiked its prices by $50-75 a tonne following enquiries reaching there from buyers from various markets including India, have also contributed to the upward swing, they said.
Pepper prices (NCDEX June 09 Contract) closed at Rs.12,469/qtl up by Rs.56/quintal as compared to Thursday’s close of Rs. 12,413/qtl.
Pepper futures after making a recent high of Rs.12,581/qtl are trading in rangebound manner tracking sluggish trades at the domestic market. Prices are likely to be steady with a weak bias in the coming weak.
Soybean
NCDEX July Soybean futures moved in a narrow range of Rs 2602.50-2659 per quintal during the last week amid lackluster demand. Arrivals of soybean were steady around 60,000-65,000 bags per day during the last week in major mandis of Madhya Pradesh. Rains play a crucial role for soybean planting in all the major soy growing areas in India. Soybean plantation is depending upon the arrival of monsoon. USDA’s weekly export figures released on Thursday, it shows negative figures for soybean due to China’s cancellation of 1,12,600 metric tonnes of soybean.
Net export sales of soybean were 36,500 tonnes. Sales need to average just 1,000 tonnes each week to reach the USDA forecast. Net export sales of Meal were 1,59,700 tonnes. Sales need to average 77,000 tonnes each week to reach the USDA forecast. In the coming week, prices are expected to move slightly up due to lower stock of soybean and strong movement in soybean and soy meal futures at CBOT and soybean plantation may be delay in Maharashtra due to slow pace of monsoon. NCDEX July soybean has support at 2555/2520 and resistance is seen at 2680/2720 levels in this week.
Guar Seed
Guar prices have corrected by almost 11% in the past 4-5 weeks as weather department’s first long range forecast (in April) had predicted that the monsoon will be near normal in the coming season (June –Sept). However, during the last week, prices settled slightly higher at Rs. per qt . Guar is the rain fed crop and the first long range weather forecast always plays a crucial role in determining the trend in Guar prices. T
he second long range forecast which would released by mid June would decide the further trend in Guar complex in the short term. Apart from monsoon, one more factor which would decide the further trend in Guar is the sowing acreage. It is expected that in the coming season farmers might shift to the other remunerative crop like cotton, which had fetched good returns in the past 3-4 years. Thus, despite normal monsoon, prices will not fall much from the current levels. Sowing of Guari which normally starts from May 15 & continues till June 15, has not yet started in the current season. Actual sowing of guar (30% gum content) crop would take place in mid July.
Guar prices are likely to trade in the range of Rs. 1650-1750 per qtl till the expiry of June contract. This is because the expectations of decline in acreage would limit the downside whereas the good monsoon progress would cap the gains at higher levels. Monsoon will play a major role in deciding the trend in Guar complex in the long term and thus a close watch is necessary during the monsoon season. IMD would give its 2nd long Range weather forecast by mid June. This would decide the further trend in Guar complex.
Wheat
In US CBOT, wheat futures are volatile and up on fund buying while in India wheat futures have been bearish on rising stock concerns. Currently, government agencies have procured huge stocks in the domestic markets due to a record production of wheat. The only factor which is supporting the Indian Wheat prices is the rising international prices.
Fund buying, stabilizing equities, and gains in crude oil and soybeans helped support the bounce in CBOT during middle of the week although fundamentals weren’t supportive of a bounce. On Thursday, commodity funds bought an estimated 5000 contracts.
Keeping aside the huge stocks in the global markets, the bullish factors which is supporting the international wheat prices are deterioration of the US winter wheat crop (45% in good-to-excellent condition as of May 24, -3 pts from the prior week) and delayed spring wheat plantings (79% as of May 24 vs. the 5-yr avg of 95%. Late on Monday USDA placed the U.S. spring-wheat crop 89% planted vs. 5-year average of 98%. Wheat prices may trade in range of 1080-11150 levels.
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