Page 4 - MEX Express - Vol 7 Issue 1

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The Commodity: An Evergreen Business
Commodity derivatives market is an ever green business of all
times which includes major sector of industries like energy,
industrial metal, precious metals, agricultural products etc. This
market runs 24 hours and 5 days in a week which empowers
itself to dominate over other business by providing flexibility and
liquidity at any point of time. 12 billion futures contracts out of 22
billion derivatives contracts were traded in all the exchanges which
represent 19 % of total share of derivatives in 2013 all over the
world. More than 20 billion commodity derivative contracts were
traded last year i.e, in 2014; which is numerically world’s highest
among global business and if we look at only agricultural futures &
option, then it is 1.40 billion equivalent to 6.4% of total international
market. The highest volume of trade was noticed in Asian exchanges
that equaled to more than 13% in the year 2013, then followed
by America(+9.7%) and the Middle East(+0.5%).These values
themselves tell story of commodity market proving it to be one of
the most demanded market.
From consumer to producers, all are involved either in commodity
or commodity derivatives. It is because all that we care are the
prices of commodities that we deal with in our day today life.
Why Gold Hit a Five - Year Low & Will Likely Fall Lower
Gold the most tradable metal and as we say safe heaven to invest is
also the most volatile metal in commodity. It is but, the fall of $1132
to around $1078 was historic fall because it reached the 5 years low
price. It was a moment of great shock for all around the world. In
below paragraph, we will try to know why the price of Gold fell so
badly and what are factors that created five years’ low price of gold.
The problems in Greece and China threw the world markets into a
tizzy over the past month. The Greeks seem schizophrenic rejecting
then accepting the latest deal from their creditors, while the Chinese
government layers on one new program after another to halt the route
in Chinese stocks. Every morning American investors must check
the latest headlines to find out if something blew up, unraveled, or
simply fell apart the night before.
It’s been a bit exhausting. But if we step back a bit and look at the
bigger picture, some corners of the market haven’t reacted to the
manic-depressive swings from overseas.
Editorial Board: Mr. Aashik Koirala / Mr. Lakshman Pandit / Mrs. Liberty Shakya
Mercantile Exchange Nepal Limited, Alliance Tower, 4th Floor, Charkhal, Dillibazar, Kathmandu, Nepal
Phone: +977-1-4011542/43/44, Fax: +977-1-4011545/6 | e-mail: editor@mexnepal.com
MARKET PERSPECTIVE
Commodity market welcomes all types of investors as per their
investment competency from small to larger investors. The market
facilitates appropriate opportunity for individuals or corporate traders,
brokers, market members, fund managers, speculators, hedgers and other
associates as well. As we know commodity trading is done online which
makes it available and accessible to all the users living anywhere. A
telephone and an internet connection is sufficient to carry out the business
in an easy mode without the need of any extra efforts and expenses.
One area that seems impervious to the emotional rollercoaster ride is
precious metals. When it comes to gold, the market appears particularly
relaxed. So relaxed that it’s at the risk of falling into a coma. If financial Recently the Chinese government reported how much gold it holds
chaos drives the price of gold, then the near-exit of Greece from the euro
zone, coupled with a free-falling Chinese stock market, should have sent
the metal soaring.
To be fair, there was a spike in mid-June that pushed the prices to $1,200.
Or maybe it was a blip. It could’ve been an accident when a trader hit
the wrong key while dusting off his computer. Whatever it was, the
momentary rebound stopped almost as quickly as it occurred, driving
the price of gold even lower. For the moment, the fear-of-financial-chaos
trade appeared dead.
It could be that no one is worried about the global financial system, or
even major parts of it, blowing up. Personally, I doubt it. I’m concerned
about major disruptions in the global financial system, and every day I
read research from others who share those fears. So the current slow-
Volume: 7 • Issue: 1 • Year: 2015 A.D
Off course, no business in the world exists without risk. There is risk
in commodity trading too but ample of paraphernalia are accessible
to mitigate risk. One thing is for sure here, the more we enhance
our knowledge the lesser is the risk. To be successful in commodity
market, we must keep a balance between risk & return and to put
the adequate flow of money supply for holding executed contracts
for assured return. The most important aspect is to be updated with
world’s financial market at all times.
We might have bad experience in this market but still there are
exchanges that are following strict compliance for welfare of the
industry. Therefore let’s embrace this developing market with full
hand to build up this market to new height like Singapore, America,
Australia, India, China, etc.
Vijay Kumar Pandey
Chief Executive Officer
Devine Investment & Trade Pvt. Ltd.
bleed in gold must be for a different reason, and I think I know what
it is.
in official reserves. The last report was in 2009, when it held 1,054
metric tons. Given that the Chinese collect a lot of foreign currency
through their trade surplus, and that they’re desperate to have their
currency included in the IMF’s special drawing rights, many people
expected their gold holdings would have at least doubled over the
last six years.
Instead, the Chinese government reported current holdings of only
1,658 metric tons, an increase of just 600 metric tons. Analysts were
expecting it would announce holdings of 2,000 to 4,000 metric tons.
As a frame of reference, the U.S. holds about 8,000.
Granted, gold’s been sliding for some time, but the drop following
the announcement by China points out an interesting characteristic.
Holding gold simply hasn’t been profitable for almost four years. At
the end of the day, profits are all what traders and investors are after.
And since 2004, there have been a lot more people involved in buying
and selling gold because of one thing – the SPDR Gold Shares ETF
(GLD) and similar securities.
This ETF invests in gold or gold derivatives (futures, swaps, etc.),
and gives everyday investors a simple way to profit from the
changing price of gold without the hassles of the futures market or
dealing with physical gold.
Notice that I said “profit from.” That’s key. Hoping to earn a profit on
a paper asset is very different from taking delivery of physical gold
bars and holding them as a hedge against economic calamity. No
one can expect the Gold Shares ETF, itself a paper asset, to protect
them in a crisis. It’s just one more entry in a digital ledger, which is
awfully hard to trade for food.
The incredible run in the price of gold from 2003 through 2011
drew investors to ETF’s like Gold Shares, creating a virtuous cycle
of higher prices. The more people that bought the ETF, the more
physical gold or gold derivatives it had to buy. That drove up the
price of gold, and hooked in more investors. But it wasn’t a straight
shot up.
The price of gold, and the Gold Shares ETF, fell in the darkest days
of the financial crisis. People flocked instead to the U.S. dollar. When
the markets calmed a bit and it became evident that central banks
would print their way out of the mess, investors returned to gold as a
hedge against inflation. But inflation never appeared. Instead, we’ve
been fighting deflation, which favors cash over precious metals.
Without a clear path for profits, the price of gold has been sliding
lower for four years, taking the Gold Shares ETF and millions of
investors with it, who then embarked on the vicious cycle of selling
as the price dropped. Central bank printing in the U.S., Japan, and
now the euro zone sure didn’t save it. The recent unrest in Greece
and China hasn’t given it much reprieve, either.
Those who purchase gold as a true hedge against financial ruin will
be able to buy it at a lower price. Of course, they’ll have to find a safe
place to store it all, but that’s a topic for a different day!
Suresh Bhatt
Managing Director
Devine Investment & Trade Pvt. Ltd.
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