Commodity Prices and Volatility - 5 tips for the week

Commodity Prices and Volatility - 5 tips for the week

Lately, commodity markets have been very predominant in the news. You may have heard of Gold reaching an all-time high in India at Rs. 34,500 per 10 gram at the end of August. Crude oil also hit a major high around the same time. Here are some tips that can help you trade commodities safely and, hopefully, profitably.

Commodity prices have shot up in the past month due to the rupee weakness

Rupee weakness affects every market in India. It has wreaked havoc on the Indices and equity prices as foreign investors pull money from funds and firms in India. It drives up domestic commodity prices because they are priced in dollars across the world and we have to exchange rupees against the dollar to purchase them. While the commodities have hit record highs in India, they are mostly trading at normal levels at other parts of the world.

Rajan's policies affect commodity prices

New RBI Governor, Raghuram Rajan's policies are setting the tone for the rupee. Already we are witnessing FII's and FDI's pouring dollars back in the country. The rupee has retreated from its all time high as global investors are gaining confidence back in India. Cheaper dollar means cheaper crude imports and a cheaper way to fund our domestic gold appetite.

Syria is rocking the global commodity markets

At the same time, there is tension in the Middle East with the possibility of the United States and other nations declaring a war against Syria. This risks a crude oil price increase across the globe. When crude prices go up, the rupee weakens. This is simply because India imports most of its crude oil and the price has to be paid in dollars. War takes a toll on a country's finances. Investors also flee to gold and other metals when they don't have confidence in global economies.

Margins have been increased across the board

We have witnessed margin increases on Equity, Currency and Commodity products on all the major exchanges in India. SEBI and FMC are keen to curb speculation trading to contain the volatility across all the products. USD INR margins were doubled at the end of July. Gold futures margins were doubled at the end of August. And most recently, base metals (Aluminum, Copper, Lead, etc...) were slapped with a 5% margin increase.

India VIX approaching 2 year high's

It's easy to understand why currency and commodity markets may be extremely volatile for the past few months. Yet, so have our local equity markets. The graph below is India's Volatility Index (known as the VIX) -- which measures the market's expectation of the volatility over the next 30 day period. The VIX is touching annual highs in the month of August and September. SEBI and the exchanges have raised margins on equity products accordingly. Fittingly, it is also known as the fear index among traders.

Conclusion

It's a tumultuous time to trade. We are witnessing a drop in volumes across all segments at the moment and it will continue for several more weeks. There is hope that some of the reforms passed by the government and the appointment of a new RBI governor will solve some of the issues present. Until we have a stable domestic and global economy, volatility will continue to persist. Let's hope that they get sorted out soon and our trading restrictions are relaxed.