Commodity Trading - Where To Begin

KASB SECURITIES LIMITED
INTRODUCTION TO COMMODITY TRADING

2 KASB SECURITIES LIMITED
Commodity Trading
KASB Securities
FX Fixed Income Equities Commodities
Sales/Trading/Research
Products & Services
Client Base
We serve more than 15,000 clients
Domestic as well as global client base
Serviced through our online and offline trading platform
Affiliation
The only domestic house with a foreign affiliation on both the Equities Sales and Research front
With our own domestic group strength and the global reach of the Bank of America Merrill Lynch (BofAML) platform, KASB
provides an unrivaled breadth of knowledge and financial services
Our relationship with Merrill Lynch, which has spanned almost two decades, gives us access to more than 60,000
professionals worldwide as well as unmatched access to one of the largest international distribution networks
One of the oldest and largest pure agency brokerage firms in Pakistan today providing a full spectrum of products and
services
Why KASB
Market Leader
Lowest Commissions
Daily Research Report
Superior Client Service Access to Commodity team till 12am
Merrill Lynch Affiliation - Provides us with access to their Research and Trading teams
Experienced team with extensive foreign markets experience
Robust Risk Management
Event Specific Research Reports
Commodity Trading
Benefits of trading on the PMEX
Only recognised platform for Futures Trading under law
Regulated by SECP
Guaranteed Settlement
No Credit Risk
Segregation of Funds
Minimal Margin Requirements
Direct Market Access / Ease of Trading
Profit on Margin Account Balances
T+0 Settlement
Pakistan Mercantile Exchange Limited (PMEX) formerly National Commodity Exchange Limited (NCEL) is the first technology
driven, de-mutualized, on-line commodity futures exchange in Pakistan. PMEXs shareholders are Karachi Stock Exchange, Lahore
Stock Exchange, Islamabad Stock Exchange, Pak Kuwait Investment Company (Pvt.) Limited, and Zarai Taraqiati Bank Ltd
Pakistan Mercantile Exchange Limited
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PMEX Volume in PKR bn
Commodity Trading
Global Perspective
Money Supply & Central Bank Action
US Financial Crisis
EU Stability
Government and Central Bank Actions
Possible introduction of Quantitative Easing
Global Growth going forward
Interest Rates
It is important to note that the Commodities Market is driven by Global Markets. As such, the ability to assess and understand
the following is necessary:
Commodity Trading
SAFE HAVEN The global economic crises and uncertainty going forward has led to money flow into gold
MONEY SUPPLY Printing of money not only in the US, but around the world
DOLLAR Dollar movement has been erratic
CENTRAL BANKS Uptick in central bank purchases
INTEREST RATE Low Interest Rate environment
ACCESS TO GOLD Investors have easier access to investing/trading gold via ETFs, Hedge Funds, Mutual Funds.
Reasons For The Rise In The Price Of Gold
The Rise Of Gold
0
200
400
600
800
1000
1200
1400
1600
1800
U
S
D
/
O
z
5 Year return 200%
3 Year return 107%
1 Year return 40%
Commodity Trading
Gold Breakdown
An alternate currency for central banks

Perceived hedge against uncertainty
Beneficiary of USD weakness
ETFs- new investors
Safe Haven Status
Display of wealth
Cultural significance specially in the sub continent
Demand linked to gold price and wedding season & religious events
India and China account for 40% of world jewellry demand
INVESTMENT DEMAND 10-30% of total demand
JEWELLERY DEMAND 60-80% of total demand
Commodity Trading
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5.00%
10.00%
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30.00%
35.00%
40.00%
45.00%
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CPI Gold PKR Returns
Gold Return & Inflation Hedge
1999 - 2009
CPI 7.5% p.a.
Gold 21% p.a.
Gold Reserves
Depreciation of PKR Vs USD
7.5% ANNUAL DEPRECIATION IN THE
LAST 20 YEARS.
Commodity Trading
Why Commodities
LONG AND SHORT - The ability to take Long and Short positions is a distinct advantage as it allows one to be able to not only
hedge but take advantage of market movement in either direction
CURRENCY HEDGE An ideal way to hedge against currency devaluation
LEVERAGE Is available in Commodities [Oil 13:1, Gold 22:1, Silver 13:1]* at no cost
TAXATION Commodities are not subject to withholding tax at the present time
DIVERSIFICATION Given limited investment avenues in Pakistan, Commodities are an ideal way to diversify investments.
INFLATION HEDGE Has historically been a hedge against inflation
EXPOSURE TO THE GLOBAL ECONOMY One of the few ways to gain exposure to foreign markets
NO MANIPULATION Due to the vast size of the Global Commodity Market, it is simply not possible to manipulate the
Commodity Market
SAFE HAVEN Safe haven status is intact as witnessed during the recent global Financial Crisis
LIQUID INVESTMENT - More liquid as compared to the other asset classes buyers and sellers are always available at market
price
*Note: Margins are Subject to change by PMEX
Commodity Trading
Risks
Risks To The Price Of Gold
High Gold
Prices
Money
Supply
Inflation
Economic
Recovery
Dollar
Central
Bank
Buying /
Selling
Commodity Trading
Product Specification & Commission Structure
Commodity Trading
Contract Tola Gold (11.664 Grams)
Specs 24 Karat, imported from Dubai
Brands ARY
Storage & Insurance Gold can be stored at the PMEX vault. 1% annual charge is in place which covers both storage and
insurance costs
Delivery If a client wants to take a delivery, he/she would have to inform the Broker. Delivery is made within
5days of request. The minimum amount required for delivery is 10 Tola Bars. Gold would be handed
over at PMEX with the broker present. (Please note that once delivered, PMEX will not accept the
Gold back.)
Trading Physical Gold is tradable online from anywhere in the world
Payment 100% margin must be deposited in the account. 100% of the value of the transaction will be
deducted at the time of order placement.
Market timings Same as Futures (5.00 am to 2.00 am)
Market Maker Is in place to provide liquidity. Every purchase or sale is done via PMEX . The Market Maker
currently buys or sells a maximum of 10 lots at a time.
Advantages Market timings
Online trading
Buyer and seller always available at market price unlike local sarafa bazar
Storage and insurance
No leverage
PMEX Physical Gold Contract Specifications
Physical Gold
Physical Delivery Account
Opened
Maximum 5 day contract.
Settlement date is one
business day after expiry
date.
PMEX takes 5 business
days to complete the
delivery process
Client will go with Broker
to PMEX vault to collect
Delivery
Physical Gold allocated in
vault on settlement date
Client provides
withdrawal request for
Physical delivery.
Deposit 100% Margin
Trade Executed
Broker notifies Client once
Delivery is ready
Process for Delivery of Physical Gold
Recommendation
For Shariah
Compliance, it is
recommended to
buy/sell in the
contract nearest to
expiry.
Note
Minimum 10 Tola
must be
accumulated in vault
to claim delivery.
Once delivery is
taken from PMEX
vault, it cannot be
re-deposited.
Clients cannot
view physical gold
due to security
reasons.
External audit is
done on Gold stored
at the PMEX vault
Physical Gold
To Login to your Trading Account
Click on Login Client Login NEXT Trading Terminal Login Based
The Trading Platform
You will be directed to the following page.
Click on the second option Continue to this website (not recommended)
Input your TraderID and Password and click on Login tab.
Main Screen
Main Screen - Categories
Contracts The different products available for trade in the commodity market
Bid Price quoted by the buyer
Bid Volume It specifies the quantity a buyer is willing to buy at a stated price
Ask Price offered by the seller
Ask Volume It specifies the quantity a seller is willing to sell at a stated price
Last Price Price that has been hit in the most recent trade
Last Volume Quantity traded in the most recent trade
High Highest Price for the day
Low Lowest price for the day
Total Volume Quantity traded in any given day
Add or Remove Contracts
Move the cursor to Profiles and click Contract profiles.
Following window will appear on your screen.
Left column shows all types of contracts.
Right column is to view contracts of your choice.
Click on a contract in the left column
and press to add it to the view contracts column.
Repeat this process to add all the contracts that you want to display on your main page and then click save.
Remove a Contract
Click on a contract in the right column
Click on a contract in the right column and press to remove it from view contracts
Order Placement
Click to sell
a contract
Click to buy
a contract
1. Select BUY or SELL on the bottom of the screen.
Order Placement
2. Press the buy tab to buy a contract or sell tab to sell a contract. The following window will pop-up on your screen
3. Drag the cursor to the contract window and select the contract you want to buy
Order Placement
4. Drag the cursor on order type window and select your order.
5. Type the last 4 digits of your Trader ID in the trader window.
Order Placement
6. Type the amount of lots.
7. Type the price if its a limit or stoploss order. If you are placing a market order, the price section does not need to be filled.
Order Placement
8. You can make use of Good Till Cancel (GTC) orders by placing a check in any of the following order type:
Buy / Sell Limit
Buy / Sell Stop loss limit
Buy / Sell Stop loss Market
A GTC order, once placed, remains in the system after every trading session until hit or cancelled due to any of the following
reasons:
Contract in which GTC has been selected, expires
Cancelled voluntarily by trader/ user
To maintain margin requirements
All GTC orders shall be loaded at the start of trading session (5 am/3 am at this time). In a volatile market traders/ users can
cancel their GTC orders in first 3 minutes of pre-open.
Order Placement
9. Press the buy tab to execute the order.
The following screen will appear for confirmation. Press OK to confirm the order or CLOSE to cancel the order.
*Repeat the same steps to sell a contract.
Working Orders
Press the working orders tab to check your limits/ stoploss orders.
Positions
Press the POSITIONS tab to check your existing long or short contracts.
Positions - Categories
Net Liquidity- Total cash available in your portfolio.
Margin Required- It is the amount of money required for booking a certain number of lots.
Buying Power- Remaining purchasing power.
Realized P/L- This is the profit/loss that has been booked during the trading day.
Unrealized P/L- This is the profit/loss outstanding but not yet booked during the trading day
% BP Used- This is the percentage of equity used in booking lots.
Types of Orders
Limit Orders
It is an order that allows a trader to set a maximum or minimum limit to either buy or sell a commodity. For instance, Gold is
trading at $1500 and the trader would like to purchase at a lower price of $1490. The trader in this case would place a buy limit
of $1490. Whenever the market price reaches the buy limit price or lower, the traders position will be executed at the buy limit
price. Similarly, if gold is trading at $1500 and the trader would like to sell at a higher price of $1510, the trader in this case
would place a sell limit of $1510.Whenever the market price reaches the sell limit price or higher, the traders position will be
executed at the sell limit price.
Note: - These orders are automatically cancelled at the end of the day, unless GTC is enabled.
Stop loss Market Orders
It is an order that can protect a trader against a sharp market movement against his position. The main purpose is to limit the
traders loss. For instance, if a trader has bought gold at $1500 and if there is a potential for the market to go below $1490, the
trader can place a stop loss order at $1490 to limit his losses to only 10$. Similarly, if a trader has sold gold at $1500 and if
there is a potential for the market to go above $1520, the trader can place a stop loss order at $1520 to limit his losses to only
$20. Placing stop loss is an integral part of trading success.
Note: - These orders are automatically cancelled at the end of the day, unless GTC is enabled.
Market Orders
It is an order that allows a trader to buy or sell at a price prevailing in the market. Before placing an order, it is very important
for a trader to check how many lots the market maker is offering to avoid execution of trade at random quotes.
Calculations
Margin Used:
Offer Price x Number of lots x Exchange Rate x Margin
Assumptions:
Price = $1750/Oz
Exchange Rate = PKRs.87
Margin = 6.25%
Number of lots = 1
(1750 x 1 x 87 x 6.25%) = PKRs. 9,515.625
Profit Earned:
(Purchase price-Bid Price) x Number of lots x Exchange Rate
Assumptions:
Offer price = $1770/oz
Bid Price = $1750/oz
Exchange Rate = PKRs.87
Number of lots = 1
(1770 1750) x 1 x 87 = PKRs. 1740
Note: Gold prices, Exchange rate and Margin are subject to change.
Above calculations do not include commissions.
Calculations
Break Even Price:
Purchase Price + [Commission charged by KASB & PMEX fee x Number of lots]
Assumptions:
Market Price = $1,750/oz
Number of Lots = 1
Exchange rate = PKRs.87
Commission charged by KASB = PKRs.25 ( each side)
Fee charged by PMEX = PKRs.25 (each side)
1750 + [(25x2 + 25x2) x 1] = $1751.149 rounded to $1.15
Breakeven Cost = (1751.15 1750) $1.15
Note: Gold prices, Exchange rate and Margin are subject to change.
Exchange Rate
87
Reports
Reports tab provides you with the following options:
Reports - Categories
Client Portal- You can view various options which will provide you details to your account.
News Wires- Displays daily news releases.
Order Details- Displays orders placed, filled and cancelled during the day.
Risk Watch- The color of details on this page turns Yellow when you are about to reach 90% of Buying Power
used. It is Red when you exceed the above stated percentage.
Economic Calendar- Displays daily economic data releases.
Client Portal
Input your TraderID and Password and click on the Login tab.
Client Portal
Client Portal
General Ledger- Displays net balance, debit and credit of funds.
Funds Detail- Displays inflow and outflow of cash to/fromyour account.
Trade Details- Displays entire trading history in detail with time, date, buy/sell position etc.
Position Summary- Displays current net positions taken.
Account Statement- Displays mark-to-market net balance for the day.
Daily Statement- Displays net balance with details of net positions taken.
% BP Used: Buying power is the amount of excess margin you have available in your account. The percentage buying power
is the percentage of total cash used in the account along with maximum margin available.
Economic Indicators
Economic indicators facilitate investment decisions. They help anticipate growth of major economies that can affect commodities.
Actual results of indicators are compared with expectations. The difference between the two, impacts commodity prices.
Commodity Price Indices: These Indices track daily market prices of commodities and raw materials.
Consumer Price Index (CPI): Consumer prices account for a majority of overall inflation. Inflation is important to currency
valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate.
Producer Price Index (PPI): It's a leading indicator of consumer inflation - when manufacturers charge more for goods the
higher costs are usually passed on to the consumer.
GDP (Gross Domestic Product): It's the broadest measure of economic activity and the primary gauge of the economy's health.
Housing Data: It's an excellent gauge of future construction activity because obtaining a permit is among the first steps in
constructing a new building.
Industrial Production: It's a leading indicator of economic health - production reacts quickly to ups and downs in the business
cycle and is correlated with consumer conditions such as employment levels and earnings
SOURCE: www.forexfactory.com
Fundamental Analysis
Non Farm Payroll: Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall
economic activity.
Trade Balance: Export demand and currency demand are directly linked because foreigners must buy the domestic currency to
pay for the nation's exports. Export demand also impacts production and prices at domestic manufacturers.
Current Account: It's directly linked to currency demand - a rising surplus indicates that foreigners are buying more of the
domestic currency to execute transactions in the country.
Money Supply: It's positively correlated with interest rates - early in the economic cycle an increasing supply of money leads to
additional spending and investment, and later in the cycle expanding money supply leads to inflation.
Oil Inventories: Change in the number of barrels of crude oil held in inventory by commercial firms during the past week.
Unemployment rate: Although it's generally viewed as a lagging indicator, the number of unemployed people is an important
signal of overall economic health because consumer spending is highly correlated with labor-market conditions.
Retail Sales: It's the primary gauge of consumer spending, which accounts for the majority of overall economic activity.
Monetary Policy Statements and Interest Rate Decisions: A sudden unexpected change in interest rates will trigger sharp
currency moves, impacting commodity prices.
SOURCE: www.forexfactory.com
Fundamental Analysis
Economic Indicators
Technical Analysis
Technical analysis is used to forecast the direction of prices through the study of past market data; primarily prices and volumes.
Support and Resistance
Support It is an area where previous buying has occurred. Once breached, it becomes an area of resistance.
Resistance It is an area where previous selling has occurred. Once breached, it becomes an area of support.
One should ideally buy above the support levels and sell close to resistance levels.
Trend lines They generally define the market direction. Daily price range of commodities are connected through their highs
and lows to judge the market trend for a specific duration.
Channels Sometimes the line connecting the highs and lows are roughly parallel, thus creating a channel formation. These
channels depict major uptrends and downtrends in the markets.
Technical Analysis
Support And Resistance
Red horizontal lines represent support and resistance levels.
Once the support is penetrated it becomes the resistance, and
vice versa.
Technical Analysis
44
Trend Lines
Technical Analysis
45
Upward Channel
Technical Analysis
46
Downward Channel
Technical Analysis
KASB Sales and Trading
Head of Commodities Contact Number Email
Mustafa Sattar +92 (021) - 111-222-000 mustafa.sattar@kasb.com
Trader Contact Number Email
Karachi
Ziyad Bin Zubair +92 (021) - 111-222-000 ext 453 ziyad.zubair@kasb.com
Sharjeel Soomro +92 (021) - 111-222-000 ext 454 sharjeel.soomro@kasb.com
Tahir Imam +92 (021) - 111-222-000 ext 335 tahir.imam@kasb.com
Zubair Sattar +92 (021) - 111-222-000 ext 457 zubair.sattar@kasb.com
Ahmed Hanif +92 (021) - 111-222-000 ext 458 ahmed.hanif@kasb.com
Kamal Ahmed +92 (021) - 111-222-000 ext 456 kamal.ahmed@kasb.com
Lahore
Farhan Ahmed +92 (042) - 111-222-000 ext 203 farhan.ahmad@kasb.com
Ghazanfar Ali +92 (042) - 111-222-000 ext 222 ghazanfar.ali@kasb.com
Islamabad
Zahid Mahmood +92 (051) - 111-222-000 ext 211 zahid.mahmood@kasb.com
Junaid Ali +92 (051) - 111-222-000 ext 212 junaid.ali@kasb.com
Atif Baig +92 (051) - 111-222-000 ext 217 atif.baig@kasb.com
Contacts
Commodity Contacts
For additional information on Commodities please contact our Commodities Team:
KASB Securities
5
th
Floor, Trade Center, I.I.Chundrigar Road
Karachi, Pakistan
UAN: 111-222-000
Email: commodities@kasb.com
Contacts
Disclaimer
This presentation and the analysis enclosed in this presentation should not be used as the sole base for any investment
decision by any of the investors. KASB adheres to the code of conduct and ethical standards set by the CFA Institute and it
encourages its clients to abide by these rules & guidelines. We hereby certify that the views expressed in this research
presentation about securities and issues accurately reflect the respective research models applied in the analysis. This
proposal is for discussion purposes only. KASB is not an expert on, and does not render opinions
regarding, legal, accounting, regulatory or tax matters. You should consult with your advisors concerning these matters before
undertaking the proposed transaction.
KASB Securities Limited
Offices
Head Office - Karachi Lahore Islamabad
5th floor, Trade Centre, 2nd floor, Fountain Avenue Building No. 2, 90-91, Razia Sharif Plaza, Jinnah Avenue,
I.I. Chundrigar Road 64, Main Boulevard, Gulberg Blue Area
UAN: +92 21 111 222 000 UAN: +92 42 111 222 000 UAN: +92 51 111 222 000
FAX: +92 21 3263 0202 FAX: +92 42 3578 7545 FAX: +92 51 227 2841
email: kasbho@kasb.com email: kasblhr@kasb.com email: kasbisb@kasb.com
Gulshan-e-Iqbal Office Karachi RahimYar Khan Office Multan
Friends Paradise, 1
st
Floor, Plot No. 29, City Park Chowk, Ground Floor,
SB-36, Block No. 13-B, Town Hall Road State Life Building,
KDA Scheme # 24, Abdali Road
Main University Road
Phone: +92 21 3498 0763,64,66 Phone: +92 68 587 3252,54 UAN: +92 61 450 0273-76
FAX: +92 21 3498 0761 FAX: +92 68 587 3251 FAX: +92 61 450 0272
email: kasbdirect@kasb.com email: kasbdirect@kasb.com email: kasbdirect@kasb.com
Gujranwala Peshawar
81, Ground Floor, First Floor,
Gujranwala Development, State Life Building ,
Authority Trust Plaza, 34 The Mall, Peshawar Cantt.,
Gujranwala Peshawar
Phone: +92 55 382 2501- 04 Phone: +92 91 527 6025-28
FAX: +92 55 382 2505 FAX: +92 91 527 1537
email: kasblhr@kasb.com email: kasblhr@kasb.com

Commodity Trading - Where To Begin

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KASB SECURITIES LIMITED

INTRODUCTION TO COMMODITY TRADING

An alternate currency for central banks

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