GLOBAL COMMODITY MARKETS

RAJAT BHATIA

NEURAL

CAPITAL

OVERVIEW OF COMMODITIES TRADING

Ancient times:
Rice Futures - 6000 Years ago in China
Options known to Greece in 350 BC Shortage of commodities sparked wars Oversupply resulted in devaluing core commodities

Modern times:
Japanese traded Futures in the 17th century OSAKA Rice Exchange 1730, first organized futures market

CBOT 1848, Evolution begins

EVOLUTION OF COMMODITY TRADING

1. Local Market Interaction
2. Comparative advantage of local market 3. Evolution of specialty markets

4. Evolution of commodity trader

5. Forward deals / derivatives 6. Centralized location / Credit Risk minimization

7. Formation of Board of Trade

8. Exchange of deals before delivery 9. Speculation on commodity outlook 10. Permitted commodity category / Listing 11. Modern day exchange 12. Derivatives / Exotics

COMMODITIES UNIVERSE

The COMMODITIES RESEARCH BUREAU INDEX (Now the Thomson Reuters/Jefferies CRB Index)
The Thomson Reuters/Jefferies CRB Index (TR/J CRB) is a commodity futures price index

First calculated by Commodity Research Bureau, Inc. in 1957 and made its inaugural appearance in the 1958 CRB Commodity Year Book

Data Source: Thomson Reuters

COMPONENTS OF THE CRB INDEX

Currently consists of commodities quoted on the NYMEX, CBOT LME, CME and COMEX SUBGROUP Energy Grains Industrials Meats MARKETS Crude Oil, Heating Oil, Natural Gas Wheat, Corn, Soybeans Copper, Cotton Live Cattle, Lean Hogs WEIGHT 17.6% 17.6% 11.8% 11.8%

Softs
Precious Metals

Coffee, Cocoa, Sugar, Orange Juice

Gold, Silver, Platinum

23.5%
17.6%

RATIONALE FOR INVESTING IN COMMODITIES

China has the worlds largest volume in commodity derivatives with a 51% global market share

SGFE = Shanghai Futures Exchange DCE = Dalian Commodity Exchange ZCE = Zhengzhou Commodity Exchange (Estd. 1990)

Source: Nomura Research Institute

THE CENTER OF GRAVITY OF GLOBAL COMMODITIES TRADING IS SHIFTING TO ASIA-PACIFIC

THREE OF THE TOP FIVE COMMODITY EXCHANGES ARE IN CHINA

RISING PER CAPITAL GDP IN INDIA AND CHINA WILL RESULT IN GREATER CONSUMPTION OF METALS

Source: RIO TINTO

FINANCIALIZATION OF GLOBAL COMMODITY MARKETS

EVOLUTION OF INDIAN COMMODITY MARKET

Bombay Cotton Trade Association Ltd. Established in 1875 Commodity specific exchanges
Gold, Jute, Pepper, Turmeric, Potatos, Sugar etc

1940s: Price controls Forward Contract Regulation Act 1952 Govt. Suspended cotton, jute, edible oilseeds trading in 1960s and 1970s During late 1970s, ban was removed on selected basis but contracts were mostly illiquid

In the early 1980s the government allowed forward trading in agricultural commodities (of lesser importance - castor seed and castor oil, jaggery, jute, pepper, potato and turmeric)
Local exchanges

National level exchanges established in 2003

CASH Versus FUTURES

Markets are separate but interrelated Cash Market
Commodities are physically bought or sold in the spot market Contracts requires actual delivery of commodities

Futures Market
Buying and selling of standardized contracts does not involve immediate transfer of ownership Possession of commodities not required Offers hedging and risk management platform Most contracts are squared off before actual delivery

Cash and Futures prices converge as contracts approach maturity

PRECIOUS METALS GOLD

CHARACTERISTICS OF GOLD
Gold is primarily a monetary asset and partly a

commodity

More than two thirds of total accumulated holdings

of Gold are driven by Investment:

Central Bank reserves Private High Net worth Investors High-carat jewelry

Less than one third of golds total accumulated

holdings is as a commodity for jewelry and industrial purposes

CHARACTERISTICS OF THE GOLD MARKET

The Gold market is highly liquid and gold held by central banks, other major institutions and retail jewelry keeps coming back into the market Due to large stocks of Gold compared to its demand, the core driver of the real price of gold is stock equilibrium rather than flow equilibrium Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets The factors determining the price of gold are fundamentally different from those of other commodities and assets. The price of gold is inversely related to its supply while it moves parallel to inflation Returns from gold and equity markets have a low correlation Price of gold is inversely related to the value of the U.S. dollar

FACTORS INFLUENCING THE GOLD MARKET

Supply from sales by central banks, reclaimed scrap and

official gold loans

Producer / miner hedging interest
World macro-economic factors:

US Dollar Interest rates Inflation Safe haven status

Comparative returns from the equity markets

WHY INVEST IN GOLD THE PORTFOLIO DIVERSION EFFECT

11.0% 10.5% 10.0% 9.5%

Return
Nifty & Gold Nifty Gold Portfolio Line

9.0% 8.5% 8.0% 7.5%

NIFTY 10.0% 8.6% 28.1% 21.8% 2.258% Period FY 2006-07 Return Risk

7.0% 6.5% 6.0% 0% 5% 10% Risk 15%

GOLD COVAR NIFTY vs. GOLD

20%

25%

30%

GOLD PRICE % ANNUAL CHANGE in VARIOUS CURRENCIES

GLOBAL GOLD PRODUCTION AND CONSUMPTION

China is the world's largest gold producer at more than 400 tons,

followed by South Africa, US and Australia

India is the worlds largest gold consumer with an annual demand of

around 800 tons.

India in the global Gold Industry India (in Tons) Total Stocks Central Bank holding Annual Production Annual Recycling Annual demand Annual Imports Annual Exports 13000 400 2 100 - 300 800 600 60 World (in Tons) 145000 28000 2600 1100 1200 3700 9 1.4 0.08 13 22 % Share

GOLD FABRICATION DEMAND

GOLD INVESTMENT AND FABRICATION DEMAND FROM CHINA AND INDIA

DEMAND FOR GOLD IN INDIA IS DRIVEN LARGELY BY FABRICATION BUT INVESTMENT DEMAND HAS PICKED UP RAPIDLY AS THE RESERVE BANK OF INDIA DIVERSIFIES ITS RESERVES FROM FOREIGN CCY TREASURIES TO GOLD

IMPACT OF FABRICATION DEMAND ON PRICE OF GOLD

ANNUAL TOTAL DEMAND for GOLD

ANNUAL TOTAL SUPPLY of GOLD

PHYSICAL GOLD HELD BY EXCHANGE TRADED FUNDS

CENTRAL BANKS - NET BUYERS OF GOLD FOR LAST 4 YEARS

NET PRIVATE AND CENTRAL BANK INVESTMENTS IN GOLD

Open for discussion in class

INVESTMENT OUTLOOK FOR GOLD

Investors have been purchasing gold for a variety of reasons over the past decade : - increased concerns regarding major reserve currencies - two recessions in the past decade (2001, 2007-2009) - negative real interest rates - concerns of inflation - poor management of issues related to trade, debt, and deficit imbalances These problems are real and some are expected to take several years to be resolved Investors are expected to continue adding to their holdings in historically large volumes! They are not, however, expected to chase gold prices higher as was seen during the past few years. Instead investors are expected to add to their holding on prices declines. This is expected to both weigh on gold investment demand and the price of gold.

NET INVESTMENT DEMAND FOR GOLD versus % PRICE CHANGE

MONTHLY SALES OF U.S. MINT GOLD COINS TO DEALERS

DECLINING PREMIUMS ON U.S. MINT GOLD COINS

CENTRAL BANK GOLD RESERVES OF MAJOR DEVELOPING COUNTRIES and % SHARE OF GOLD IN TOTAL RESERVES

RISING GOLD SUPPLY FROM MINES + HIGH SCRAP RECOVERY

RISING PRICES INCREASED SPENDING ON GOLD EXPLORATION

GOLD MINING HAS BECOME EXTREMELY PROFITABLE

MARGIN BETWEEN GOLD PRICE AND CASH COST

PRICE OF GOLD

CASH OPERATING COST OF GOLD PRODUCTION

90% OF GOLD WAS MINED AT BELOW US$ 947 IN 2011

GROSS NEW ADDITIONS TO GLOBAL GOLD MINE CAPACITY

CUMULTIVE GOLD PRODUCTION SURPASSES 5 BILLION OUNCES

ENERGY
CRUDE OIL, ELECTRICITY, NATURAL GAS HEATING OIL, COAL

AMERICAN ENERGY SOURCES 1775 to 2011

1775 1885 : Wood served as the primary form of energy until it was surpassed by coal in 1885 1885 1950 : Coal was the main source of energy 1950 - Coal was overtaken by petroleum and natural gas in the 1950s. Second half of the 20th century - natural gas experienced rapid development, and coal began to expand again. Late in the 20th century, nuclear electric power and other renewable energy were developed and supplied significant amounts of energy Recently, natural gas consumption surpassed coal Now, petroleum consumption declining, and consumption of other renewable energy growing

Data Source: U.S. Energy Information Administration Annual Energy Review

PRIMARY ENERGY CONSUMPTION IN AMERICA BY SOURCE AND SECTOR (Quadrillion Btu)

KEY CHARACTERISTICS OF ENERGY MARKETS How they are different from other markets
Energy prices, are characterized by abrupt and unanticipated large changes Known as jumps or spikes

Temporary price spikes are the result of supply shocks such as wars, and embargos in the case of oil markets. In electricity markets the breakdown of generation or transmission constraints account for a large part of the total variation of changes In spot prices
In deregulated Power markets, firms that are not prepared to manage the risk arising from large price spikes can see their earnings for the whole year evaporate in a few hours

That is, they do not jump to a new level and stay there, but rather quickly revert to their previous levels. The use of mean reversion alongside jumps allows us to simulate this spiking behavior
Price spikes are especially notorious in on-peak hourly and daily prices. For weekly or monthly averages, the effects of price spikes are usually averaged away in the data

VOLATILITY CURVES FOR MAJOR ENERGY COMMODITIES

Energy prices have high short term volatility because supply cannot adjust to demand quickly How would the Volatility Curve for Gold look like ?

GEOPOLITICAL AND GLOBAL ECONOMIC EVENTS IMPACT CRUDE OIL PRICES

price per barrel (real 2010 dollars, quarterly average)
140
imported refiner acquisition cost of crude oil 120 WTI crude oil price Global financial collapse

100

Iran-Iraq War Low spare capacity

80 U.S. spare 60 capacity exhausted Saudis abandon swing producer role 9-11 attacks

Asian financial crisis

40
Iranian revolution Arab Oil Embargo 1975 1980

OPEC cuts targets 4.2 mmbpd

Iraq invades Kuwait 1985 1990 1995 OPEC cuts targets 1.7 mmbpd 2000 2005 2010

20

0 1970

Sources: U.S. Energy Information Administration, Thomson Reuters Adam Sieminski September 17, 2012

49

FACTORS DRIVING THE PRICE OF GASOLINE AT THE PUMP

The Price of crude is by far the most important and most volatile component of the price of gasoline REFINERY SPREAD The difference between the Gasoline price curve and the Crude Oil price curve33

OIL CONSUMPTION IS DRIVEN BY ECONOMIC GROWTH

percent change (year-on-year)
12 10 8 6 4 2 non-OECD liquid fuels consumption non-OECD GDP

Forecast

0
-2 -4 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: U.S. Energy Information Administration Short Term Energy Outlook, September 2012 and Thomson Reuters Adam Sieminski September 17, 2012

52

IS THE FORWARD CURVE A GOOD PREDICTOR OF SPOT PRICES ?

BEHAVIOR OF ELECTRICITY SPOT PRICES

MEAN REVERSION : Power prices tend to fluctuate around values determined by the cost of production and the level of demand.

SEASONALITY : Power prices change by time of day, week, month and year in response to cyclical fluctuations in demand.
NON-STORABILITY : Electricity cannot be stored and once generated it needs to be consumed almost immediately. The lack of storability means that electricity prices do not follow a smooth process as prices of other commodities do.

PRICE SPIKES : Power prices exhibit occasional price spikes due to supply shocks such as transmission constraints and unexpected outages
REGIONAL DIFFERENCES : Due to non-storability and transmission constraints, spot prices and forward curves may vary drastically from region to region

ELECTRICITY MIX GRADUALLY SHIFTS TO LOWER-CARBON OPTIONS, LED BY GROWTH IN RENEWABLES AND NATURAL GAS
electricity net generation trillion kilowatthours per year 2010

27% Natural gas 24% 10% Renewables 16%

45%

Coal

39%

Oil and other liquids

20% 1%

Nuclear

18%

1%

Source: EIA, Annual Energy Outlook 2012 Early Release Howard Gruenspecht AEO2012, January 23, 2012

55

ELECTRICITY TENDS TO FLOW SOUTHWARDS IN THE USA

California is the largest net importer of electricity, consuming power produced in the Northwest and Southwest, which provide 25% of California's electricity supply.

IN 2010, U.S. ELECTRICITY GENERATION WAS 70% FOSSIL FUELS, 20% NUCLEAR, AND 10% RENEWABLE
2010 Total net generation: 4,120 billion kWh Other gases 0.3%
Nuclear 19.6% Natural gas 23.8% Conventional hydroelectric 6.2% Other 0.3% Other renewable 4.1% Wind: 2.3% Solar thermal and PV: <0.1%

2010 Non-hydro renewable net generation: 168 billion kWh

Wood and woodderived fuels: 0.9%

Coal 44.9% Geothermal: 0.4% Other biomass: 0.5%

Petroleum 0.9%

Source: EIA, Annual Energy Review, October 2011 Howard Gruenspecht AEO2012, January 23, 2012

57

ELECTRICITY SUPPLY CURVE IN AMERICA HOW SOURCE OF ELECTRICITY VARIES WITH GENERATION

NATURAL GAS FORWARD CURVE AND SPOT PRICES

U.S. BECOMES A NET NATURAL GAS EXPORTER IN 2022

U.S. dry natural gas trillion cubic feet History 2010 Projections Net exports, 2035 5%

Net imports, 2010 11% Consumption

Domestic production

Source: EIA, Annual Energy Outlook 2012 Adam Sieminski November 7, 2012

60

UNDERGROUND SOURCES OF NATURAL GAS

Source: modified from U.S. Geological Survey Fact Sheet 0113-01. Howard Gruenspecht Washington, DC - May 16, 2011 61

US NATURAL GAS PIPELINE NETWORK NETWORK IS A HIGHLY INTEGRATED NATURAL GAS TRANSMISSION AND DISTRIBUTION GRID COVERING LOWER 48 STATES

11,000 delivery points 5,000 receipt points 1,400 compressor stations and interconnection points 24 hubs or market centers 8 LNG import facilities 100 LNG peaking facilities 49 locations where natural gas can be imported/exported via pipelines

210+ NATURAL GAS PIPELINE SYSTEMS ACROSS 305,000 MILES

THE 400+ NATURAL GAS STORAGE FACILITIES ACROSS THE USA

RESIDENTIAL NATURAL GAS PRICES EXPECTED TO CLOSELY FOLLOW LAST WINTERS PRICES
dollars per thousand cubic feet (mcf)

Source: EIA Short-Term Energy Outlook, October 2012 Short-Term Energy and Winter Fuels Outlook October 19, 2012

64

RESIDENTIAL HEATING OIL PRICES EXPECTED TO AVERAGE 2% HIGHER THIS WINTER THAN LAST
dollars per gallon

Forecast

Home heating oil retail price includes taxes. Source: EIA Short-Term Energy Outlook, October 2012 Short-Term Energy and Winter Fuels Outlook October 19, 2012

65

HEATING OIL REMAINS MORE EXPENSIVE THAN NATURAL GAS

U.S. average residential winter heating fuel prices dollars per million Btu history forecast

Winter (October - March)

Source: EIA Short-Term Energy Outlook, October 2012 Short-Term Energy and Winter Fuels Outlook October 19, 2012

66

THE AVERAGE DELIVERED PRICE OF COAL TO ELECTRICITY GENERATORS VARIES WIDELY ACROSS U.S. REGIONS TRANSPORT COSTS ARE A KEY REASON
2010 Delivered coal prices, $ per million Btu
$2.02 $2.01 $2.96 $3.41

N/A $1.51 $1.49 N/A $2.48 $1.57 1.77 $2.45 $1.93 $1.83 $1.83 $3.40 $3.65 $1.46 $1.75 $2.91

National Average Minimum Maximum $2.25 $1.46 $4.46

$1.91
$4.46

Source: EIA, Annual Energy Outlook 2012 Early Release Howard Gruenspecht Santa Fe, March 12, 2012 67

GROWING SHALE GAS SUPPLIES ARE PROJECTED TO MORE THAN OFFSET DECLINES IN OTHER U.S. NATURAL GAS SOURCES
U.S. dry gas production trillion cubic feet per year History 2010 Projections

23%

Shale gas

49%

26% 9% 2% 9% 10% 21%

Tight gas Non-associated offshore Coalbed methane Associated with oil Non-associated onshore

21% 7% 7% 7% 9%

Alaska

1%

Source: EIA, Annual Energy Outlook 2012 Early Release Howard Gruenspecht Santa Fe, March 12, 2012

68

WHILE ELECTRICITY CONSUMPTION GROWS BY 23% OVER THE PROJECTION, THE ANNUAL RATE OF GROWTH SLOWS
percent growth (3-year rolling average) History 2010 Period Annual Growth 1950s 9.8 1960s 7.3 1970s 4.7 1980s 2.9 1990s 2.4 2000-2010 1.0 2010-2035 0.8 Projections

Source: EIA, Annual Energy Outlook 2012 Early Release Howard Gruenspecht AEO2012, January 23, 2012

69

NON-HYDRO RENEWABLE SOURCES ARE PROJECTED TO MORE THAN DOUBLE BETWEEN 2010 AND 2035
non-hydropower renewable generation billion kilowatthours per year 2010

Advanced biofuels cogeneration

Biomass
Power sector Industrial CHP

Wind

Solar Geothermal Waste

Source: EIA, Annual Energy Outlook 2012 Early Release Howard Gruenspecht AEO2012, January 23, 2012

70

NON-OECD LIQUID FUELS USE IS EXPECTED TO SURPASSES ALMOST FLAT OECD LIQUID FUELS USE IN THE NEAR FUTURE
total liquids consumption million barrels per day History 2010 Projections 62 Non-OECD 46 48

OECD
41 40%

35%

Other non-OECD

19%

OECD Americas

Source: U.S. Energy Information Administration, Annual Energy Outlook 2012 Adam Sieminski September 17, 2012

71

DOMESTIC PRODUCTION OF SHALE GAS AND TIGHT OIL HAS GROWN DRAMATICALLY OVER THE PAST FEW YEARS
shale gas production (dry) billion cubic feet per day tight oil production for select plays million barrels of oil per day

Sources shale gas: Lippman Consulting, Inc. gross withdrawal estimates as of August 2012 and converted to dry production estimates with EIA-calculated average gross-to-dry shrinkage factors by state and/or shale play. Source tight oil: HPDI, Texas RRC, North Dakota department of mineral resources, and EIA, through June 2012. Adam Sieminski November 7, 2012

72

STOCHASTIC MODELING OF COMMODITY PRICES

The Case of ELECTRICITY MARKETS

MODELING OF ELECTRICITY SPOT PRICES

Electricity spot prices can be modeled using The Jump Diffusion Process which has the following components:
Part 1: GEOMETRIC BROWNIAN MOTION (GBM) GBM is a continuous-time stochastic process in which the logarithm of the randomly varying entity follows a Brownian Motion + a Drift (Brownian Motion is also called a Wiener process) Part 2: MEAN REVERSION By adding mean reversion to a continuous price diffusion process modeled by Geometric Brownian Motion and a volatility term structure allows us to capture electricity price dynamics without spikes Part 3: SPIKES or JUMPS By adding an abnormal, discontinuous jump process modeled by a Poisson distribution allows us to model discontinuous price jumps resulting from disruptions in supply such as outages or transmission constraints

BROWNIAN MOTION or WEINER PROCESS

Consider a variable z whose value changes continuously.
The change in the variable z in a small interval of time Dt is Dz The variable follows a Wiener process if the following hold:

1.

Dz e Dt where e is (0,1)
e is a normal distribution with mean = 0, and std. dev. = 1

2. The values of Dz for any two different periods of time are independent as long as they are non-overlapping A Wiener process has a drift rate (i.e. average change per unit time) of 0 and a variance rate of 1 Mean of [z (T ) z (0)] is 0 Variance of [z (T ) z (0)] is T The path traced by a molecule as it travels in a liquid or a gas is a Brownian Motion or a Weiner Process Note: Stock prices do NOT follow a Weiner Process. Rather, they follow a Geometric Brownian Motion which consists of a Weiner Process + A Drift

GEOMETRIC BROWNIAN MOTION or RANDOM WALK

A Geometric Brownian motion (GBM) is a continuous-time stochastic process in which the logarithm of the randomly varying entity follows a Brownian Motion (also called a Wiener process) + a Drift

An Ito Process for Stock Prices is a Random Walk or Geometric Brownian Motion

DS SDt sSe Dt Drift Rate (or expected return) s Volatility

The walk of a stumbling drunk man going home from the pub alone is a Random Walk or a Geometric Brownian Motion

GEOMETRIC BROWNIAN MOTION or RANDOM WALK

DS SDt sSe Dt

Drift Rate (or expected return) s Volatility

GEOMETRIC BROWNIAN MOTION WITH MEAN REVERSION

Geometric Brownian Motion with Mean Reversion, is similar to the walk of a stumbling drunk man who is being guided home from the bar along an empty street by his trusty German Shepard dog, Rusty The direction and size of his stumbles constitute Geometric Brownian motion However, the size of his stumble is bounded by the length of the leash Hence, the direction of his stride reverts back towards Rustys position the Mean As the drunk stumbles away from Rusty, he will eventually be pulled back toward Rusty as the leash reaches its limit Mean Reversion

GEOMETRIC BROWNIAN MOTION WITH MEAN REVERSION

The mean reversion component or drift term is Governed by the distance between the current price and the Mean Reversion Level as well as by the mean reversion rate.

If the spot price is below the mean reversion level, the mean reversion component will be positive, resulting in an upward influence on the spot price. Alternatively, if the spot price is above the mean reversion level, the mean reversion component will be negative, thus exerting a downward influence on the spot price. Over time, this results in a price path that drifts towards the mean reversion level, at a speed determined by the mean reversion rate.

RANDOM PRICE SIMULATOR SHOWING MEAN REVERSION

GEOMETRIC BROWNIAN MOTION WITH MEAN REVERSION

GEOMETRIC BROWNIAN MOTION WITH AND WITHOUT MEAN REVERSION

GEOMETRIC BROWNIAN MOTION WITH MEAN REVERSION and JUMPS

Now imagine that on rare occasions a car passes by and Rusty begins to chase after it
The drunk is quickly and violently yanked in the direction of the car Over time, the drunk is eventually pulled back to a normal position as Rustys fascination with the vehicle dissipates and the trusty canine reverts to travelling in a homeward direction

ELECTRICITY SPOT PRICES for CINERGY REGION in AMERICA

One MAPP trade in June 1998 reached a price of $7,500/MWh, for 50MW volume
Electricity prices do not jump; they spike
They do not jump to a new level and stay there They go up suddenly and quickly revert to their previous levels

Traders who were not well hedged lost hundreds of millions of dollars in a single day, and bankruptcies resulted
Price spikes are especially notorious in on-peak hourly and daily prices

The effects of price spikes are averaged away in weekly or monthly prices

GEOMETRIC BROWNIAN MOTION WITH MEAN REVERSION AND JUMPS

The END

GROWTH OF GLOBAL ALUMINIUM CONSUMPTION DRIVEN LARGELY BY CHINA

Source: RIO TINTO

AGRICULTURAL COMMODITIES

CHARACTERISTICS OF AGRICULTURAL COMMODITIES

Agricultural commodities
Grains, pulses, oil seeds, spices, cotton fiber, jute

In general, certain characteristics of agricultural product markets set them apart from most non-agricultural product markets and
Agricultural product prices more volatile than are the prices of most non-farm goods and services Three key characteristics of agricultural commodities:
the seasonality of production, the derived nature of their demand, and generally price-inelastic demand and supply functions.

Each agricultural commodity (wheat, rice, corn, soybeans, and cotton) have certain unique structural characteristics that further differentiate the nature of market price formation from each other

FUNDAMENTALS of AGRICULTURAL COMMODITY MARKETS

P* represents the equilibrium point where demand meets supply in the marketplace.

New market information, such as crop failure, outbreak of animal disease, major revisions to previous crop production estimates, can alter the expectations of market participants and lead to a new equilibrium price as sellers and buyers revise their prices based on new information An outward shift in demand from the market equilibrium would raise the price P* as Demand moves to the right along the Supply curve. Similarly, an outward shift in supply from the market equilibrium would lead to lower price P* as Supply moves to the right along the Demand curve. These price changes would only be short term. In the long-run, producers would alter their planting decisions in light of the new price expectations.

COMMON ATTRIBUTES OF MARKET STRUCTURE

More market participants leads to greater price competitiveness Greater product differentiation leads to greater price differences among

products and markets. The commoditys homogeneity in terms of type, variety, quality, and end-use characteristics results in lower price differentiation becomes more price sensitive

More close substitutes means buyers have greater choice and the demand curve Greater storability gives the seller more options in terms of when and under

what conditions to sell his products. prevents price manipulation

Greater transparency of price formation, (open auction versus private contracts) The ease of commodity transfer between buyers and sellers and among markets,

i.e. greater mobility limits spatial price differences

Artificial restrictions on the market processes (government policies or market

collusion from a major participant) tend to prevent the price from reaching its natural equilibrium level other restrictions such as market collusion by a few large buyers suppresses market prices

Restrictions such as import barriers limit supply and keep prices high, while

FORCES DRIVING MARKET PRICES

Local Supply and Demand Conditions
Seasonality Product Characteristics Transfer Costs Geographical differences of price elasticity

Government Policies

AGRI COMMODITIES IN INDIA - CHANA (Chick Peas)

Chana belongs to the chickpea family and there are two main types Desi and Kabuli. Desi chickpeas is the main type grown in India.
Indias chana production fluctuates between 4-7 million tons and is normally 40%

of Indias total pulse production of 12-15 million tons Maharashtra.

The major producing states are Madhya Pradesh, Uttar Pradesh, Rajasthan and

Chana is a rabi crop and is cultivated from November to March. The peak arrival

period begins in April at the major trading centers of the country

India accounts for two-thirds of the worlds chickpea production. India imports around 300,00 to 400,000 tons of chickpeas annually The major countries from where India imports chickpeas are Canada, Australia,

Iran and Myanmar.

Indian chana markets are highly fragmented, with very long value chain. The

major players in the value chain are commission agents, brokers, stockists, wholesale traders, dal mills, wholesalers and retail outlets.

The information flow between these participants is restricted and very slow.

Chana: Major Trading Centre

Indore, Bhopal, Vidisha in Madhya Pradesh Jalgaon, Latur, Mumbai, Akola in Maharashtra Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar, Hanumangarh in Rajasthan Other major centers are are Delhi, Chennai, Kanpur, Hapur,

Market Influencing Factors

Chana can withstand moisture stress to a certain extent. However, the production highly fluctuates between years, depending on the rains received and the moisture availability in the soil. The sentiments of traders play a significant role currently, as a consequence of the lack of freeflow of information. Stocks present with stockists and the stocks -toconsumption ratio. Imports and the crop situation in the countries from where imports originate, viz., Canada, Australia, Myanmar.

Example: Wheat

Wheat is grown in almost every temperate-zone country of North America, Europe, Asia, and South America. The largest wheat producing countries are China, India, the United States, Russia, Canada, and Australia. U.S. wheat production accounts for about 910% of world production; but the United States is the worlds leading wheat exporter with roughly a 25% share of annual world trade. However, the international wheat market is very competitive and foreign sales often hinge on wheat variety and product characteristics

Characteristics of Silver

Despite being classed as a precious metal, it is used as a catalyst and in the photography industry Often called as Industrial Commodity, due to its unique industrial properties
Strength, Malleability, Ductility, electrical and thermal conductivity,

sensitivity to high refractive index.

Very few substitute for silver in most applications, particularly in high-tech uses in which reliability, precision and safety are paramount
The largest users of silver are the photography, jewelry and electronic industries Mexico, United States and Peru are the primary producers of mined silver

Silver: International & Domestic Market

International
Silver is predominantly traded on the London Bullion Market (LBMA)

and COMEX in New York.

physical market.

LBMA is the global hub of OTC trading in silver, is the metals main COMEX, in contrast, is a futures and options exchange. It is here that

most fund activity is focused.

Silver is invariably quoted in US dollars per troy ounce.

Domestic
Silver imports in India decreased, as domestic consumption fell

sharply

Indian industrial demand is also estimated to have decreased

Factors Influencing Silver Markets

World mine production is more a function of the prices of other metals. Economically viable primary mined silver is a function of the world silver price level.

Often a faster growth in demand against supply leads to drop in stocks with government and investors.
Other gold fundamental factors as supply from sales by central banks, institutions, reclaimed scrap

World macro-economic factors- US Dollar, Interest rate etc.

Comparative returns on stock markets Domestic demand based on monsoon and agricultural output Silver demand depends on three main factors, - jewellery & silverware, industrial and photography industries, which are in turn dependent on monsoon & agricultural output, overall industrial growth and performance of the tourism & services industry at large, respectively. In India the real industrial demand occupies a small share in the total

MAJOR COMMITTEES
Datwala Committee in 1966 Khusro Committee in 1980
Recommended the reintroduction of futures trading in

major commodities

Kabra Committee in 1993

Recommended amendments to FCRA Recommended resumption of forward trading for the

benefit of farmers

SILVER PRICE % ANNUAL CHANGE in VARIOUS CURRENCIES

COPPER

Characteristics of Copper

Copper ranks third in world metal consumption after steel and aluminum. It is a product whose fortunes directly reflect the state of the world's economy Copper is the best non-precious metal conductor of electricity.

The metals exceptional strength, ductility, and resistance to creeping and corrosion, makes it the preferred and safest conductor for building wires . Copper is also used in power cables, either insulated or uninsulated, for high, medium and low voltage applications.
Copper is an essential component of energy efficient motors

Copper: Demand & Supply

Global Scenario
Economic, technological and societal factors influence the supply and demand of copper.

As society's need for copper increases, new mines and plants are introduced and existing ones expanded.

The global production of refined copper is around 15 million tons The major copper-consuming nations are Western Europe (30%), the United States (19%),

Japan (14%), and China (5%).

Copper and copper alloy scrap composes a significant share of the world's supply. The largest international sources for scrap are the United States and Europe. Chile,

Indonesia, Canada and Australia are the major exporters and Japan, Spain, China, Germany and Philippines are the major importers.

Indian Scenario
The Indian Copper Industry size is around 4 lakh tons (approx 3% of world copper market) Birla Copper, Sterilite Industries and Hindustan Copper Ltd are major producers. India is emerging as net exporter of copper from the status of net importer Two major states owned telecommunications service providers; BSNL and MTNL consume

10% of countrys copper production.

Factors Influencing Copper Markets

Copper prices in India are fixed on the basis of the rates that rule on LME the preceding day. World copper mine production through exploration of new mine and expansion of existing mine

Economic growth of the major consuming countries such as China, Japan, Germany etc.

Commodities Characteristics

Energy commodities
World crude oil reserves are estimated at more than one trillion barrels, of which

the 11 OPEC Member Countries hold more than 75 per cent. OPEC's Members currently produce around 27 million to 28 million barrels per day of oil, or some 40 per cent of the world total output, which stands at about 75 million barrels per day.

Classification of (Petroleum) Oil

Class A: Light, Volatile Oils - These oils are highly fluid, often clear, spread rapidly on solid or water surfaces, have a strong odor, a high evaporation rate, and are usually flammable. They penetrate porous surfaces such as dirt and sand. They do not tend to adhere to surfaces; flushing with water generally removes them. Class B: Non-Sticky Oils - These oils have a waxy or oily feel. Class B oils are less toxic and adhere more firmly to surfaces than Class A oils, although they can be removed from surfaces by vigorous flushing. Evaporation of volatiles may lead to a Class C or D residue. Medium to heavy paraffin-based oils fall into this class. Class C: Heavy, Sticky Oils - Class C oils are characteristically viscous, sticky or tarry, and brown or black. Flushing with water will not readily remove this material from surfaces, but the oil does not readily penetrate porous surfaces. Weathering or evaporation of volatiles may produce solid or tarry Class D oil. Toxicity is low, but wildlife can be smothered or drowned when contaminated. This class includes residual fuel oils and medium to heavy crudes. Class D: Nonfluid Oils - Class D oils are relatively non-toxic, do not penetrate porous substrates, and are usually black or dark

Categories of Crude Oil

West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 degrees (making it a "light" crude oil), and it contains only about 0.24 percent of sulfur (making a "sweet" crude oil). WTI is generally priced at about a $2-4 per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to Brent, although on a daily basis the pricing relationships between these can very greatly.

Brent Crude Oil stands as a benchmark for Europe.

India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has identified China & India as their main buyers of oil in Asia for several years to come.

Factors Influencing Crude Oil Markets

Shortage of oil supplies Taxation - When oil taxes are raised, end consumers often mistakenly blame the oil producers, but it is really their own governments that are responsible. Balance of demand and supply in the short term Rate of investment in the longer term Accidents Bad weather Increasing demand Halting transport of oil from producers

DECLINE IN GROSS PURCHASES OF GOLD BY CENTRAL BANKS SINCE 2009 ALONG WITH A FASTER DECLINE IN GROSS SALES

Energy Derivatives

Value Chain

Crude Oil

Basics

Contributes over 40% of the world energy demand More than 150 grades available depending on geographical location Differentiation based on specific gravity and sulphur content WTI, Brent, MES, Tapis, Minas, etc. constitute the world benchmarks

Proved Reserves
Proved Reserves (bn bbls)

Africa 10%

Asia-Pacific 3%

North America 6%

South & Central America 10%

Europe & Eurasia 11%

Middle East 60%

Global Demand
World Demand

Asia-Pacific 30%

North America 28%

Africa 3%

Middle East 8% Europe & Eurasia 24%

South & Central America 7%

Global Supply
World Supply

Asia-Pacific 10% Africa 13%

North America 16% South & Central America 8%

Middle East 32%

Europe & Eurasia 21%

Indian Scenario
Indian Demand-Supply
3.50 3.00 2.50

mn bbls per day

2.00 1.50 1.00 0.50 0.00 2000 2001 2002 2003 2004 2005 Supply 2006 2007 2008

Demand

Oil & Gas Indian History

1991 94: 4th, 5th, 6th, 7th and 8th Rounds of exploration bidding

1999: New Exploration Licensing Policy (NELP)

2000: NELP II 2002: NELP III 2003: NELP IV 2004: NELP V

2006: NELP VI
2007: NELP VII

Discoveries from NELP

Market Structure

Reserves

Established Reserves 65 bn bbls

Refining

19 refineries: 17 in Public Sector, 2 in Private Sector Capacity had grown from 62 MMT in April 1998 to 149 MMT in Jan 2007 Refining capacity expected to reach 235 MMT by April 2012 Surplus refining capacity of 86 MMT projected in 2011-12

Growth in Petroleum Product Demand

Exchanges trading crude oil derivatives

NYMEX ICE TOCOM MCX

NCDEX

Contract Comparison Crude Oil

Parameter
Lot Size (bbls) Price Quotation Tick Size Position limits (lots) Delivery

Nymex / ICE MCX

1000 US$ / bbl US$ 0.01 / bbl No limits 100 Rs. / bbl Re. 1 Member 12000 Client 4000 lots or 15% of mkt OI

NCDEX
100 Rs. / bbl Re. 1 Member 12000 Client 4000

Yes

Financially settled

USD / bbl
100.00 120.00 140.00 160.00 20.00 40.00 60.00 80.00 0.00

10/4/04 1/4/05 4/4/05 7/4/05 10/4/05 1/4/06 4/4/06 7/4/06 10/4/06 1/4/07 4/4/07 7/4/07 10/4/07 1/4/08 4/4/08 7/4/08 10/4/08 1/4/09 4/4/09 7/4/09 10/4/09

Oil Price Trend

Crude Price

Price Determining Factors

Demand Supply Inventories / Stockpiles OPEC Geo-political issues

Weather
Currency (USD) Economy

Lots
1000000 1500000 2000000 2500000 3000000

Performance Nymex and ICE

Total Vol

500000

1/3/2005 4/3/2005 7/3/2005 10/3/2005 1/3/2006 4/3/2006 7/3/2006 10/3/2006 1/3/2007 4/3/2007 7/3/2007 10/3/2007 1/3/2008 4/3/2008 7/3/2008 10/3/2008 1/3/2009 4/3/2009 7/3/2009

Total OI

Nymex Crude

Lots

Total Vol 200000 400000 0

1000000

1200000

600000

800000

1/4/2005 3/4/2005 5/4/2005 7/4/2005 9/4/2005 11/4/2005 1/4/2006 3/4/2006 5/4/2006 7/4/2006 9/4/2006 11/4/2006 1/4/2007 3/4/2007 5/4/2007 7/4/2007 9/4/2007 11/4/2007 1/4/2008 3/4/2008 5/4/2008 7/4/2008 9/4/2008

Total OI

ICE Crude

Lots
100000 150000 200000 250000 300000 50000

Performance MCX and NCDEX

Total Vol

1/3/2006 3/3/2006 5/3/2006 7/3/2006 9/3/2006 11/3/2006 1/3/2007 3/3/2007 5/3/2007 7/3/2007 9/3/2007 11/3/2007 1/3/2008 3/3/2008 5/3/2008 7/3/2008 9/3/2008 11/3/2008 1/3/2009 3/3/2009

Total OI

MCX Crude

bbls
100000 200000 300000 400000 500000 600000 700000 800000

5/3/2009 7/3/2009 9/3/2009

Total Vol

Total OI

8/14/2007 10/14/2007 12/14/2007 2/14/2008 4/14/2008 6/14/2008 8/14/2008 10/14/2008 12/14/2008 2/14/2009 4/14/2009 6/14/2009 8/14/2009
NCDEX Crude

Natural Gas

Basics

Clean energy source minimum emissions

Used mainly by fertilizer and power industry

Some countries provide NG based heating solutions for homes and industries

Proved Reserves
Proved Reserves (TCF)
North America 5% South & Central America 4%

Asia-Pacific 8%

Africa 8%

Europe & Eurasia 34%

Middle East 41%

Global Demand
Demand (BCF per day)
Asia-Pacific 16% North America 27% Africa 3%

Middle East 11% South & Central America 5%

Europe & Eurasia 38%

Global Supply
Supply (BCF per day)

Asia-Pacific 13% North America 27% Africa 7%

Middle East 12%

South & Central America 5%

Europe & Eurasia 36%

Indian Scenario
NG - Indian Scenario
4.50 4.00 3.50 3.00

bcf per day

2.50 2.00 1.50 1.00 0.50 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008

Demand

Supply

Domestic Gas Production

National Gas Grid

Exchanges trading natural gas derivatives

NYMEX ICE MCX

Contract Comparison Natural Gas

Parameter
Lot Size (mmBtu)

Nymex
10000

MCX
1250

Price Quotation
Tick Size Position limits (lots)

US$ / mBtu
US$ 0.001 / mmBtu No limits

Rs. / mmBtu
Rs. 0.01 / mmBtu Member 2 crore mmBtu Client 50 lakh mmBtu or 20% of mkt OI Financially Settled

Delivery

Yes

USD / mmBtu
10.000 12.000 14.000 16.000 18.000 0.000 2.000 4.000 6.000 8.000

NG Price Trend

10/4/04 1/4/05 4/4/05 7/4/05 10/4/05 1/4/06 4/4/06 7/4/06 10/4/06 1/4/07 4/4/07 7/4/07 10/4/07 1/4/08 4/4/08 7/4/08 10/4/08 1/4/09 4/4/09 7/4/09 10/4/09

NG Prices

Price Determining Factors

Demand Supply Inventories / Stockpiles Weather

Lots

Total Vol 1000000 1200000 1400000 1600000 200000 400000 600000 800000 0

1/3/2005 4/3/2005 7/3/2005 10/3/2005 1/3/2006 4/3/2006 7/3/2006 10/3/2006 1/3/2007 4/3/2007 7/3/2007 10/3/2007 1/3/2008 4/3/2008 7/3/2008 10/3/2008
Nymex NG

Performance Nymex and ICE

Total OI

Lots

1/3/2009 4/3/2009 7/3/2009

Total Vol

100000

120000

140000

20000

40000

60000

80000

1/4/2005 4/4/2005 7/4/2005 10/4/2005 1/4/2006 4/4/2006 7/4/2006 10/4/2006

Total Vol

ICE NG

1/4/2007 4/4/2007 7/4/2007 10/4/2007 1/4/2008 4/4/2008 7/4/2008 10/4/2008 1/4/2009 4/4/2009 7/4/2009

Lots

Performance MCX

Total Vol

100000

120000

140000

160000

180000

200000

20000

40000

60000

80000

Total OI

7/10/2006 9/10/2006 11/10/2006 1/10/2007 3/10/2007 5/10/2007 7/10/2007 9/10/2007 11/10/2007 1/10/2008 3/10/2008 5/10/2008 7/10/2008 9/10/2008 11/10/2008 1/10/2009 3/10/2009 5/10/2009 7/10/2009 9/10/2009
MCX NG

Current Issues

Absence of statutory framework in the upstream

industry

Incidence of cross subsidy due to social obligations Domestic reserves/production will not be sufficient Cross-border gas pipelines facing uncertainty, but

attracting interest

Inability to take international prices

Furnace Oil

Basics

Also known as Fuel Oil, its a product of petroleum distillation mid-distillate

Used in furnaces / boilers for generating heat

Also used in engines for generating power

Indian Scenario
Furnace Oil in India
14000 12000 10000

'000 Tonnes

8000 6000 4000 2000 0 2003-04 2004-05 2005-06 2006-07 2007-08

Production

Consumption

Import Export Status

India - Imports and Exports
5000 4500 4000 3500

'000 Tonnes

3000 2500 2000 1500 1000 500 0 2004-05 2005-06 2006-07 2007-08

Imports

Exports

Pricing Regime

Price dismantled from April 2002 Price calculated by refiners Price declared every fortnight Based on Weighted Avg Price of previous fortnights international price

Applicable till next price announcement

Challenge for exchanges

Market looks forward to price discovery and risk management avenues, however, tandem between spot and futures market missing Discount on base price offered by PSU refiners on bulk quantity purchase

USD / MT
100.00 200.00 300.00 400.00 500.00 600.00 700.00 800.00 900.00 0.00

10/6/2004 1/6/2005 4/6/2005 7/6/2005 10/6/2005 1/6/2006 4/6/2006 7/6/2006 10/6/2006 1/6/2007 4/6/2007 7/6/2007 10/6/2007 1/6/2008 4/6/2008 7/6/2008 10/6/2008 1/6/2009 4/6/2009 7/6/2009 10/6/2009

Intl Price Trend

Furnace Oil (FOB Singapore)

Aviation Turbine Fuel

Basics

Highly controlled monopoly of PSUs Irrational tax structure High prices compared to global standards International airlines enjoy cheaper fuel rates compared to domestic airlines (25%)

Pricing Structure

Domestic v/s International prices

Tax Structure - Statewise

The Road Ahead..

Opening up the energy sector completely. Market based Price Discovery Opening up the commodity market to Funds, FIIs and Banks Evolution of Risk Management avenues

Questions??

Gold a hedge against Dollar & Uncertainty

Different forms of Forex Reserves

Forex Deposits and Bonds Forex Exchange Gold SDRs IMF Reserve positions

Dollar falling as a % of Reserves

Dollar as % of Forex Reserves- 1999

6.40% 2.90% 0.20% 1.60%

Dollar as % of Forex Reserves -2008

0% 4% 3%

2%

17.90% 70.90%

27% 64%

US dollar

Euro

Pound sterling

Japanese yen

Swiss franc

Other

US dollar

Euro

Pound sterling

Japanese yen

Swiss franc

Other

Ever since the introduction of the Euro as a Currency in 1999 it has managed to garner a Share of 27%

Fundamentals on Bullion Central Bank FX Reserves

Rank

Country/ Monetary Authority

billion USD (end of month)

change in year 2007

World official gold holding (March 2009)[6]

1 2 3

People's Republic of China

$ 2132 (Jun 2009)

1[1]

32.90% 8.70% 16.60%

Rank

Country/Organization

Gold in Tonnes

Japan
Eurozone

$ 1019 (Jun 2009)[2]

$ 531 (Feb 2009) $ 401 (Jul 2009)
2 [3]

Gold's share of Total Forex reserves (% of Forex Reserves)

Russia

1 2 3 4 5 6

4 5

Taiwan

$ 321.09 (Apr 2009) [4]

$ 271 (Jul 2009)
2 [5]

2.70% 64.40%

India

6 7 8 9 10

South Korea Brazil Hong Kong Singapore Germany

$ 232 (Jun 2009)

105.90% 14.60% 19.10% -

$ 214 (Aug 2009) 3

$ 186 (Mar 2009) $ 166 (Mar 2009) $ 144 (Feb 2009)

7 8 9 10

Eurozone United States Germany International Monetary Fund France Italy SPDR Gold Trust (a Gold exchange-traded fund)

10,856.90 8,133.50 3,412.60 3,217.30 2,487.10 2,451.80

60.70% 78.90% 71.50% 72.60% 66.50%

1,104[8]

0.90% 41.10% 2.20% 61.70%

People's Republic of China 1,054.0[9] Switzerland 1,040.10 Japan 765.2 Netherlands 612.5

COT Report

45000 40000

Dollar Index

25000 20000 15000 10000 5000 0

Open Interest & Non Commercial Longs and Shorts

35000 30000 25000 20000 15000 10000 5000 0

Open_Interest_All NonComm_Positions_Short_All Comm_Positions_Short_All

NonComm_Positions_Long_All Comm_Positions_Long_All

From a low of 3,934 lots on 18-Aug-2009 the number of longs have increased to 12,790 lots as on 27-Oct-09 and the Non Commercial shorts have increased from 11,184 to 21,715 lots. In a similar time frame the OI has increased from 25,171 to 36,160 lots.

Commercial Longs and Shorts

Alternatives

Euro

Japanese Yen
Alternatives

Gold

Chinese Yuan

SDRs

Chinese Yuan Next Global Currency??

Chinese Yuan not fully convertible Yuan Denominated Bonds bought/sold by Chinese Banks & banks like ADB. etc Trading within a strict controlled regime Chinese holdings of US $ denominated assets. China not wishing to make Yuan convertible in short/Medium Term
Major Governments thus, not comfortable holding large sums

China entering into currency swaps Argentina, Hong Kong, Indonesia, Malaysia, South Korea.
Value of Such trade : $95 Billion : US-Chinese Trade - $333 Billion

To directly compete with Dollar, Yuan would have to made fully convertible
Prices dictated by market: Traders, Investors & Governments freely

buying/selling

Lowering all kinds of financial trade barriers, Allowing foreign access

SDRs Can it replace the Dollar?

Dollar Reserves SDRs Special Drawing Rights created by the IMF in 1969 by issuing SDR worth 21.4 Billion $. In Sept 2009 amount of SDRs increased from 21.4 Billion $ to 204.1Billion $
Ran k Country/ Monetary Authority People's Republic of China billion USD (end of month) change in year 2007

$ 2132 (Jun 2009)

1[1]

32.90%

2
3 4 5

Japan
Eurozone Russia Taiwan India

$ 1019 (Jun 2009)[2]

$ 531 (Feb 2009) $ 401 (Jul 2009)
2 [3]

8.70%
16.60% 2.70% 64.40%

$ 321.09 (Apr 2009) [4] $ 271 (Jul 2009)

2 [5]

Negligible as compared to forex reserves Globally SDRs being issued in proportion of their IMF quotas. I.e India 2%, China3.7% SDR not a currency, but a claim on 4 currencies ie.Dollar 44%; Euro 34%; Yen-11%; Pound Sterling-11%

Why Gold?
International currency Safe commodity Brings liquidity to market Portfolio Diversification Hedge against inflation

1. 2. 3. 4. 5.

GOLD RESPONDS WHEN YOU NEED IT MOST

Gold Demand-Supply

Worldwide Gold Supply

Prices in $ (London PM Fix)

Supply in Tonnes

2500 2000 1500 1000 500 0 2002 2003 2004 2005 2006 2007 2008

800 600 400 200 0

800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008

Mine Production Old Gold Scrap Net Producer Hedging

Official Sector Sales Implied Net Disinvestment Prices in $(London PM Fix)

Total Fabrication Net Producer De-hedging Prices in $(London PM Fix)

Bar Hoarding Implied Net Investment

Prices in $(London PM fix)

Gold Demand in tonnes

3000

1000

3500 3000 2500 2000 1500 1000 500 0

Worldwide Gold Demand

1000

Gold as a percentage of Reserves

SPDR Gold ETF Holdings

1200 1100 1000 900 800 700 600 500 400

SPDR Gold ETF Holding in Tonnes

Holdings in Tonnes

4/9/07

6/9/07

8/9/07

2/9/08

4/9/08

6/9/08

8/9/08

2/9/09

4/9/09

6/9/09

10/9/07

12/9/07

10/9/08

12/9/08

8/9/09

Holdings in SPDR have increased from 1,095.33 tonnes to 1,103.52 tonnes in the month of October. This indicates that there has been an increase in interest in Gold as an investment in view of higher inflation expectations and dollar debasement in the long run.

10/9/09

Ishares Silver Trust ETF

Ishares Silver ETF holdings 10000

Holdings in Tonnes

9000 8000 7000 6000 5000 4000

7/25/07

9/25/07

1/25/08

3/25/08

5/25/08

7/25/08

9/25/08

1/25/09

3/25/09

5/25/09

7/25/09

11/25/07

Inflows into Silver ETFs have failed to sustain momentum and it has been sluggish. After holdings hitting a high of 8,828 tonnes in the beginning of August the same has fallen to 8,744 tonnes, though one has seen an increase in holdings in October 2009.

11/25/08

9/25/09

Gold Speculative Positions and Open Interest

600000 550000 500000 450000 400000 350000 300000 250000 200000 150000 100000

Gold Open Interest & Speculative Positions

60000 55000 50000 45000 40000 35000 30000 25000 20000 15000

070103

070313

070522

070731

071009

071218

080226

080506

080715

080923

081202

090210

090421

090630

Open_Interest

NonComm_Positions_Long

NonComm_Positions_Short

One has observed that price rise in Gold has been supported by a rise in Open Interest and an increase in Non Commercial Longs which is supportive of higher Gold prices

090908

Non Commercial Shorts

Open Interest & Non Commercial Longs

Gold Hedge Positions

Gold Commercial Longs and Shorts

Gold Non Commercial Longs
140000 120000 100000 80000 60000 350000 300000 250000 200000 150000

070103

070417

070731

071113

080226

080610

080923

090106

090421

Comm_Positions_Long

Comm_Positions_Short

Physical Traders have from increased their Net Longs from 84,923 lots to 89,306 lots and their Net Shorts from 360,157 lots to 372,785 lots

090804

Gold Non Commercial Shorts

160000

400000

Silver Speculative Positions and Open Interest

200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 18000 16000 14000 12000 10000 8000 6000 4000 2000 0

1/3/2007

5/6/2008

3/13/2007

5/22/2007

7/31/2007

10/9/2007

2/26/2008

7/15/2008

9/23/2008

12/2/2008

2/10/2009

4/21/2009

Open_Interest_All NonComm_Positions_Short

12/18/2007

NonComm_Positions_Long

The Open Interest has increased by 4,148 lots and the Speculative longs have decreased by 3,952 lots and the Speculative shorts have decreased by 682 lots which is supportive of higher prices in Silver.

6/30/2009

9/8/2009

Non Commercial Shorts

Non Commercial Longs & Open Interest

Silver Open Interest and Speculative Positions

Gold Hedge Positions

Silver Commercial Positions

50000 45000 40000 35000 30000 25000 20000 130000 120000 110000 100000 90000 80000 70000 60000 50000 40000

Non Commercial longs in Lots

1/3/2007

5/6/2008

3/13/2007

5/22/2007

7/31/2007

10/9/2007

2/26/2008

7/15/2008

9/23/2008

12/2/2008

2/10/2009

4/21/2009

Comm_Positions_Long

12/18/2007

Comm_Positions_Short

Physical Traders have from increased their Net Longs from 26,732 lots to 29,343 lots and their Net Shorts from 90,838 lots to 93,705 lots.

6/30/2009

9/8/2009

Non Commercial shorts in Lots

Gold Hedge against Uncertainity Gold and LIBOR 3m

The 3-month LIBOR a benchmark interest index rate having fallen from a peak of 4.5% At the time of the insolvency of Lehmann Bros has fallen to 0.28% today indicating flush Liquidity and too much paper money chasing assets

Macro Risk Index (MRI)

Risk appetite surged in October, according to our Macro Risk Index, amid better than expected US corporate earnings. Long-term MRI declined from 37.1% to 29.4% touching levels last seen in June 2007 which is in turn a bullish indicator for riskier assets like Equities and Commodities and bearish for safe assets like USD.

Low Interest Rates Worldwide

Low Interest rates worldwide and ample liquidity would help maintain bullish sentiments in Bullion. Emerging economies and Europe would be faster to pull back stimulus packages as compared to US

Trade Deficit

One has seen the dollar weaken on the basis of persistent trade deficits since the 90s. After seeing a fall in Trade Deficit from June 2008 one has seen the same picking Up on the back of stimulus packages , Housing Tax benefits.

Inflationary Pressures

After seeing negative inflation rates of 2.5-3 % in late 2008 and Q1 2009 one has seen the same come back to a positive zone.

Dollar Going Forward

Dollar appears weak; As one sees recovery in the world economy, one would see investors moving out of Dollar assets like Treasury Bills and into riskier assets. Year end target appears to be 1.56

Importance of INR in Gold

One observes that last year Gold in Intl Markets fell from a high of 1,032$ to approx 700$ in end 2008, however, a similar fall was not observed in India as Rupee depreciated from Rs. 39.20 to Rs. 47/-

Dollar Index

A weaker dollar index indicating further support to bullishness in Bullion Prices

Caution Factors in Bullion

Gold has failed to register new highs when denominated in other currencies apart from the US Dollar, which has weakened significantly over the last 6 months. Gold prices in Euro are still around 20% below their all time highs. Inflows into ETFs have failed to keep up the momentum. After seeing a high of 1,134 tonnes in the first week of June one has seen a constant fall in holdings till now. Another interesting fact is that the speculative positions of Non-Commercial participants are just a bit shy of the year high of 509,678 lots. This makes Gold vulnerable to sharp corrections should profit booking come in. The only reason which has supported this rally in gold and Equity markets together is the abundant liquidity infused by Central Governments worldwide which has caused sharp prices across all asset classes.

Factors to drive Gold and Dollar

Low Interest Rates across countries Monetary expansionary policies of Governments globally Buy back of Toxic assets Performance of other economies i.e. Japan, Europe Inflation expectations in the US and worldwide Uncertainty in Financial Markets Strategic and Safe Haven Buying: A Crisis Currency

Lower CBGA limits of 400 tonnes annually

Persistent Trade Deficits Fiscal Deficit

Contango & Backwardation

If the spot price of the asset is less than the futures price of the underlying asset then market is said to be in CONTANGO. Futures price converges close to the spot price of the underlying asset during the delivery month of the futures contract . When the delivery period is reached, the futures price is close to the spot price.

If spot price of the asset is more than futures price of the underlying asset, then the market is said to be in BACKWARDATION. On futures contract expiry spot price and futures price converges with each other.

Understanding Basis, spreads, cost of carry, and convenience yield

Basis: Basis is the difference between the cash price of an asset and the futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures market. If cash price is less than the futures price than basis is negative and if cash price is more than the futures price than basis is positive. When the cash price of an asset increases more than futures price of the underlying asset it is called strengthening of the basis and when the futures price of the underlying asset increases more than cash price of the asset it is called weakening of the basis.

Spread: Spread is the difference in prices of two futures contracts. Futures market can be a normal market or an inverted market. If the price of more distant futures contract is higher than the near month futures contract, then it is referred as a normal market. If the price of more distant futures contract is lower than the near month futures contract, then it is referred to as an inverted market. Spread can be classified as intra commodity spreads and inter commodity spreads. Intra commodity spreads means difference in price between two futures contracts of different expiry months of the same commodity. Inter commodity spread means difference in price of two different commodities with same expiry month.

Basis

When basis strengthens the difference between the spot and futures prices narrows. Basis has a tendency to narrow as the delivery month approaches. Conversely, when basis weakens the difference between the spot and futures prices widens.

Spot cash bids that are 30 under are indicative that the market is telling the seller to wait, the market does not want the grain right now, and a later sale is warranted
Basis bids of 30 over or better is indicative that the market is telling the seller that an immediate cash sale is warranted, the market wants the grain now Basis bids vary over time, sometimes from day to day, or even within a trading day. The basis level reflects a certain set of circumstances that are affecting the market at that given point in time. A strong basis is indicative of a short supply. As soon as supply needs are met, basis levels (offerings) will weaken. A crop year when a short supply is anticipated or forecast will result in strong basis offerings until supply needs are met. A large supply is indicated by a weak basis. A crop year when supplies are predicted to be ample is indicative that basis levels will weaken. The basis for commodities differs from one delivery point to another. Typically, basis bids are different within the region for each cash delivery point. The most common reasons given for differences in basis bids offered, from one delivery point to another, are:
Location, in regard to proximity to demand for the commodity

Spread Futures market spreads indicate how much traders expect cash prices to rise (or fall) in the coming months.

Usually, if prices are at historical highs, traders expect prices will decline as the short supply is allocated to limited buyers, and thus spreads become INVERTED, meaning the further out you go, the lower futures prices are. Inverted futures markets present a great opportunity to sell gold in the cash market and buy back a discounted, distant futures month with a call option (same as a minimum price contract at your elevator) or futures contract (same as a basis fix contract at your elevator). You effectively own the gold on paper at a much lower cost than owning the physical commodity, thus incurring storage costs.
However, more typically spreads are positive, and thus this market situation is called a NORMAL spread market. Generally, in a NORMAL spread market, spreads do not exceed the cost of storage. If spreads do exceed the

Cost of Carry & Convenience Yield Cost of carry model: The cost of carry model can be defined as:

F=S+C
Where F=Futures price S=Spot price C=Cost of carry For example: If the cost of 100 grams of gold in the spot market is Rs. 160,000 & the cost of carry is 12% p.a., the fair value of a 4 month futures contract will be F=S+C F = 160,000 + 6400

The fair value of a futures price with ontinuous/ daily compounding can be expressed as:

Where: F=Futures price S=Spot price r =% cost of financing n = Time till expiration of the contract e = 2.71828

For INVESTMENT COMMODITIES:

Where Fo= Current price of the futures contract

Commodity Market Participants

Hedgers Speculators Arbitragers

Their Function and Contribution

Benefits to the producers, growers, consumers, intermediaries and others Risk management, margin requirements, Price and position limits Surveillance, loss monitoring, default risk management, settlement guarantee fund

Commodity Risk Management

Food companies are exposed to volatile input costs The ability to manage commodity cost is dependent upon
1. An understanding of the corporate objectives regarding cost

control

2. The ability to forward price raw materials 3. The ability to match forward purchases to forward sales 4. The ability to pass through market cost changes 5. The ability to manage market movements

World-class companies fully understand point 1, have done the market analytics to

A Disciplined Approach

A disciplined risk management approach requires

Development of a commodity procurement policy

consistent with the overall corporate objectives profile

Incorporating product pricing practices into the risk Determining hedging mechanisms that meet accounting

standards

Developing hedging strategies that provide cost

containment

Developing measurement and reporting schemes for

performance

Taking coverage appropriate to the above processes

Goals of a Commodity Risk Mgmt. Strategy

Major Goals:

Provide profit predictability to business Minimize total commodity cost Protect business against major commodity price increases Avoid forcing major purchase decisions during crisis situations.

Supporting Goals:

Maintain a competitive commodity cost structure

Commodity Risk Management Process

Established procedure for implementation Policy Controls Training Communication

Commodity risk management strategy development Fundamental Supply/Demand Outlook Technical / Seasonal Trend Analysis Market Network Strategy Alternatives
Business Strategy Integration Price Flexibility Price Leadership and Competitive Position

The Layered Approach of Commodity Risk Management Strategy (Ex.)

Premise

Significant market rallies last 6 months or less Facilitates scale down ownership
Approach

Maintain a minimum of 6 months total coverage( or appropriate product

re-pricing window)
Utilizing a combination of cash, futures, and options (layers)

Coverage in each layer may vary based on market opinion

Purpose

Protects against catastrophic price run ups Reduce anxiety Avoid reactive position taking
Why is it successful?

Avoids extreme price peaks

The Layered Approach

Positions if
Neutral May April Bullish Bearish

Options Options 2 months Futures Futures 2 months 3 months 1 month Options 3 months

March
February January December

Futures
1 months Physicals 2 months

Physicals 2 months

Physicals 2 months

Margin Requirement
Why
Clearing Corp as Central Counter Party Credit and Price Risk Liquidity Risk

How
EWMA VaR SPAN (Standard Portfolio Analysis of Risk) Estimation of worst case loss scenario

Overview of EWMA & SPAN

Simple Avg. SMAWMAEWMA

VaR

SPAN: These Scan Risk Scenarios provide sixteen different potential market scenarios and show the associated gain/loss per Contract.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Price Unchanged; Volatility up the Volatility Scan Range Price Unchanged; Volatility down the Volatility Scan Range Price up 1/3 the Price Scan range; Volatility up the Volatility Scan Range Price up 1/3 the Price Scan range; Volatility down the Volatility Scan Range Price down 1/3 the Price Scan range; Volatility up the Volatility Scan Range Price down 1/3 the Price Scan range; Volatility down the Volatility Scan Range Price up 2/3 the Price Scan range; Volatility up the Volatility Scan Range Price up 2/3 the Price Scan range; Volatility down the Volatility Scan Range Price down 2/3 the Price Scan range; Volatility up the Volatility Scan Range Price down 2/3 range the Price Scan; Volatility down the Volatility Scan Range Price up 3/3 range the Price Scan; Volatility up the Volatility Scan Range Price up 3/3 range the Price Scan; Volatility down the Volatility Scan Range Price down 3/3 range the Price Scan; Volatility up the Volatility Scan Range Price down 3/3 range the Price Scan; volatility down the Volatility Scan Range Price up extreme (3 times the Price Scan Range) - Cover 30% of loss Price down extreme (3 times the Price Scan Range) - Cover 30% of loss

Margin

Margins
Initial Margins Extreme Loss Margins Calendar Spread Margins Final Settlement Margins Online MTM loss monitoring

Forms of Collaterals
Cash Equivalent
Cash, Bank Guarantees, Fixed Deposits, Govt.

Securities

Real Time Monitoring

Alerts to members at margin utilization and MTM loss Automatic movement of members into square off mode
Members can only reduce positions

Automatic movement of members into normal mode for trading upon reduction of open position / margin fulfillment

Limits
Price Limits Position Limits

Settlement Guarantee Funds

Contract Specification

COMEX: Gold Futures

Code Venue

GC CME ClearPort, CME Globex, Open Outcry (New York)

Contract Unit
Pricing Quotation Hours

100 troy ounces.

U.S. dollars and cents per troy ounce. CME ClearPort:

Sunday - Friday 6:00 p.m. - 5:15 p.m. New York Time/ET (5:00 p.m. - 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)
CME Globex: Sunday - Friday 6:00 p.m. - 5:15 p.m. ET (5:00 p.m. - 4:15 p.m. CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT) New York Trading Floor: 8:20 AM to 1:30 PM ET (7:20 AM to 12:30 PM CT) Minimum Price Increment Trading Months $0.10 (10) per troy ounce ($10.00 per contract). Trading is conducted for delivery during the current calendar month; the next two calendar months; any February, April, August, and October falling within a 23-month period; and any June and December falling within a 60-month period beginning with the current month. Trading terminates at the close of business on the third last business day of the maturing delivery month.

Termination of Trading Position Limts Rulebook Chapter Settlement Exchange Rule

NYMEX Position Limits NYMEX Rulebook Chapter 113

Physical | COMEX These contracts are listed with, and subject to, the rules and regulations of COMEX

COMEX: Gold Option

Code Venue Contract Unit Pricing Quotation OG CME ClearPort, CME Globex, Open Outcry (New York) One COMEX Division gold futures contract. U.S. dollars and cents per troy ounce. CME ClearPort: Sunday - Friday 6:00 p.m. - 5:15 p.m. New York Time/ET (5:00 p.m. - 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT) CME Globex: Sunday - Friday 6:00 p.m. - 5:15 p.m. ET (5:00 p.m. - 4:15 p.m. CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT) New York Trading Floor: 8:20 AM to 1:30 PM ET (7:20 AM to 12:30 PM CT) Minimum Price Increment Strike Prices $0.10 (10) per troy ounce ($10.00 per contract). $10.00 per ounce apart for strike prices below $500, $20.00 per ounce apart for strike prices between $500 and $1,000, $50.00 per ounce apart for strike prices above $1,000. For the nearest six contract months, strike prices will be $5.00, $10.00, and $25.00 apart, respectively. The options are American-style and can be exercised at any time up to expiration. On the first day of trading for any options contract month, there will be 13 strike prices each for puts and calls. Termination of Trading Expiration occurs on the fourth business day prior to the underlying futures delivery month. If the expiration day falls on a Friday or immediately prior to an Exchange holiday, expiration will occur on the previous business day.

Hours

Position Limts Rulebook Chapter Settlement

Exchange Rule

NYMEX Position Limits NYMEX RulebookChapter 115

Physical | OG
These contracts are listed with, and subject to, the rules and regulations of COMEX

CME: Soybean Futures

Contract Size Deliverable Grade Pricing Unit Tick Size (minimum fluctuation) Contract Months/Symbols Trading Hours

5,000 bushels (~136 metric tons) #2 Yellow at contract price, #1 Yellow at a 6 cent/bushel premium, #3 Yellow at a 6 cent/bushel discount Cents per bushel 1/4 cent per bushel ($12.50 per contract) January (F), March (H), May (K), July (N), August (Q), September (U) & November (X) CME Globex (Electronic Platform) 6:00 pm - 7:15 am and 9:30 am - 1:15 pm Central Time, Sunday - Friday Open Outcry (Trading Floor) 9:30 am - 1:15 pm Central Time, Monday - Friday

Daily Price Limit

Settlement Procedure Last Trade Date Last Delivery Date Product Ticker Symbols

$0.70 per bushel expandable to $1.05 and then to $1.60 when the market closes at limit bid or limit offer. There shall be no price limits on the current month contract on or after the second business day preceding the first day of the delivery month. Physical Delivery The business day prior to the 15th calendar day of the contract month. Second business day following the last trading day of the delivery month. CME Globex ZS S=Clearing Open Outcry S

Exchange Rule

These contracts are listed with, and subject to, the rules and regulations of CBOT.

CME : Soybean Option

Contract Size Tick Size (minimum fluctuation)

One Soybean futures contract (of a specified month) of 5,000 bushels 1/8 of one cent per bushel ($6.25 per contract) Trading shall be conducted for put and call options with striking prices in integral multiples of ten (10) cents and twenty (20) cents per bushel. More details on strike price intervals are outlined in Rule 11A01.E. January (F), March (H), May (K), July (N), August (Q), September (U) & November (X); a monthly (serial) option contract is listed when the front month is not a standard option contract. The monthly option contract exercises into the nearby futures contract. For example, an October option exercises into a November futures position. $0.70 per bushel expandable to $1.05 and then to $1.60 when the market closes at limit bid or limit offer. There shall be no price limits on the last trading day. For Standard and Serial Option Contracts: The last Friday which precedes by at least two business days the last business day of the month preceding the option month. The buyer of a futures option may exercise the option on any business day prior to expiration by giving notice to the Clearing House by 6:00 p.m. Chicago time. Option exercise results in an underlying futures market position. Options in-the-money on the last day of trading are automatically exercised. Unexercised Soybean futures options shall expire at 7:00 p.m. on the last day of trading. CME Globex (Electronic Platform) 6:00 pm - 7:15 am and 9:30 am - 1:15 pm Central Time, Sunday - Friday Open Outcry (Trading Floor) 9:30 am - 1:15 pm Central Time, Monday - Friday

Strike Price Intervals

Contract Months (Symbols)

Daily Price Limit

Last Trade Date

Exercise Expiration Trading Hours

Product Ticker Symbols

CME Globex OZS Open Outcry CZ for calls/PZ for puts

Exchange Rule

These contracts are listed with, and subject to, the rules and regulations of CBOT.

Hedging Strategies

Trading Strategies

10100

8900

9100

9300

9500

9700

9900

Gold- Calendar spreads

Apr
Avg. Difference: 154

June Diff

12 /7 /2 00 12 6 /1 4/ 20 12 06 /2 1/ 20 12 06 /2 8/ 20 06 1/ 4/ 20 07 1/ 11 /2 00 1/ 7 18 /2 00 1/ 25 7 /2 00 7 2/ 1/ 20 07 2/ 8/ 20 07 2/ 15 /2 00 2/ 7 22 /2 00 7
0 50 100 150 200 250

10000

11000

7000

8000

9000

4/ 7/ 20 06

4/ 14 /2 00 6

4/ 21 /2 00 6

4/ 28 /2 00 6

Gold- Calendar spreads

OCT
5/ 5/ 20 06 5/ 12 /2 00 6 5/ 19 /2 00 6 5/ 26 /2 00 6 6/ 2/ 20 06

Gold Spread

AUG

6/ 9/ 20 06

6/ 16 /2 00 6

Gold Spreads
8250 8230 8210 8190 8170 8150 8130 8110 8090 8070 8050 1/30/2006 1/31/2006 2/1/2006 2/2/2006 2/3/2006 2/4/2006
Feb Apr June

15000

16500

18000

19500

21000

22500

9/6/06 9/13/06 9/20/06 9/27/06 10/4/06 10/11/06

Mar May Diff

0 150 300 450 600 750 900

10/18/06 10/25/06 11/1/06 11/8/06 11/15/06 11/22/06 11/29/06 12/6/06 12/13/06 12/20/06 12/27/06 1/3/07

Silver- Calendar spreads

14500

16500

18500

20500

22500

24500

4/ 1/ 20 06 4/ 8/ 20 06 4/ 15 /2 00 6 4/ 22 /2 00 6 4/ 29 /2 00 6 5/ 6/ 20 06 5/ 13 /2 00 6 5/ 20 /2 00 6 5/ 27 /2 00 6 6/ 3/ 20 06 6/ 10 /2 00 6 6/ 17 /2 00 6

Silver- Calendar spreads

JULY SEP
6/ 24 /2 00 6 7/ 1/ 20 06

Silver Spread

Silver Spreads

18000

17200

16400 4/1/2006

May
4/2/2006 4/3/2006

Jul
4/4/2006

Sep
4/5/2006 4/6/2006

9300
Regular Mini

9400

9500

9600

9700

Gold Regular V/S Mini

7/ 22 /2 00 6 7/ 23 /2 00 6 7/ 24 /2 00 6 7/ 25 /2 00 6 7/ 26 /2 00 6 7/ 27 /2 00 6 7/ 28 /2 00 6

18400
6 6

18600

18800

19000

19200

19400

8/ 23 /2 00 8/ 24 /2 00 8/ 25 /2 00

Silver Regular V/S Mini

Regular Mini

8/ 26 /2 00 6 8/ 27 /2 00 6 8/ 28 /2 00 8/ 29 /2 00 8/ 30 /2 00 8/ 31 /2 00

Comex-MCX Correlation

Gold
11000 10500 10000 9500 9000 8500 8000 7500 7000 750 700

Correl:99.22%

650 600 550 500

6 6 6 6 6 6 6 6 6 6 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 20 20 / / / / / / / / /2 / / 7 1 4 8 4 8 1 5 3 3 9 / / 1 3 1 2 1 2 1 2 2 1 5 1/ 1/ 2/ 2/ 3/ 3/ 4/ 4/ 5/

Comex

MCX

Grains

Meats

Industrial Metals

Precious Metals

Energy

Food & Fiber

Corn Soybeans

Cattle Hogs

Aluminium Copper

Gold Platinum

Crude oil Heating oil

Cocoa Coffee

Wheat

Lead

Silver

Natural gas

Cotton

Oats

Nickel

Unleaded gas

Lumber

Soy meal

Palladium

Electricity

Orange juice

Soybean oil

Zinc

Rubber

Comex-MCX Correlation

24000 22000 20000 18000 16000 14000

SILVER

1600 1500 1400 1300

Correl : 98.79%

1200 1100 1000

MCX
3-Jan 17-Jan 31-Jan 14-Feb 28-Feb 11-Apr 25-Apr 9-May

Comex
6-Jun 23-May 20-Jun

900 800

12000

14-Mar

28-Mar

Commodity Indices

Some of the Commodity Indices

Dow Jones-AIG Commodity Index
Goldman Sachs Commodity Index Thomson Reuters/Jefferies CRB Index Rogers International Commodity Index Merrill Lynch Commodity Index Deutsche Bank Liquid Commodity Index UBS Bloomberg Constant Maturity

Commodity Index

Increased Interaction of Commodity Market with Financial markets

Commodity Index Investing

Discussion Point
Access to Geographical spread Lesser Transaction Cost Less Volatility Portfolio Diversification Financialization of Commodities Can be Structured around other asset classes Convenience

GSCI vs. DJ-AIG (2008)

Index Methodology
Types
Spot Index Excess Return Index Total Return Index Capped Trend Indicator Rule Based Trading Strategy embedded

Clearing and Settlement

Clearing
Clearing of trade A system through which

Exchanges guarantee the faithful compliance of trade

Clearing House insures

Trade follow up Control on Open Interest Financial clearing of payment

flow

Effective timely settlement

Physical / Financial Guarantee

Administration of Financial

Delivery

Delivery Period
Specified delivery period (or month) of relevant contract

Tender Period
Period for delivery intimation by Buyer / Seller

Delivery Orders
Instructions for delivery

Delivery Lot Permissible limit / Grade / Quantity

Adjustment of freight / Discount / Premium

Evidence of stock in Possession Surveyor certificate

Pricing of Delivery Order based on Settlement Price

Reasons for Penalty

Failure to pay margin Violation of Open Position Failure to pay Fees Wrong Declaration Non-Submission of Information Violation of Rules / Byelaws Price Manipulation Contract violation

Rules for Commodity Portfolios

Prudent Mind-Set SMART Financial Goal

Specific, Measurable, Achievable, Realistic, Time

Constraint

Understand Risk Profile

Optimal Asset Mix

Maximize Asset Location Diversify, Diversify, Diversify Index it Employ Time not Timing

Think Portfolio not Component Investments

Components of the CRB Index

California Has the Worlds Biggest Solar Thermal Power Plants Nine solar power plants, in three locations in California's Mojave Desert, comprise the Solar Energy Generating Systems (SEGS). SEGS VIII and IX (each 80 megawatts), located in Harper Lake, are, individually and collectively, the largest solar thermal power generating plants in the world. The SEGS plants are concentrating solar thermal plants. Concentrating solar power technologies use mirrors to reflect and concentrate sunlight onto receivers that collect the solar energy and convert it to heat. This thermal energy can then be used to produce electricity via a steam turbine or heat engine driving a generator3

AS CHINA BECOMES THE WORLDS FACTORY, ITS SHARE OF GLOBAL CONSUMTION OF MAJOR COMMODITIES IS RISING AS AMERICA OUTSOURCES ITS MANUFACURING ITS SHARE OF GLOBAL CONSUMPTION OF COMMODITIES IS FALLING

Source: RIO TINTO

U.S. Total Energy Consumption Estimates by End-Use Sector, 1949-2011

Source: U.S. Energy Information Administration Annual Energy Review