Table of Content

Introduction Commodities Commodities Market Commodities Exchange Commodities Futures Need

History

Financial Market and Commodity Market

Difference between Financial and Commodity Market

Indian Commodity Market and Global Commodity Market

Difference between Indian and Global Commodity Market

Commodities Traded

Special Commodities Traded

Procedure for trading

How to invest

Regulation for trading

Comparative study

Gold and commodity

Dollar and commodity

Dollar and Gold

Annexure

Terms and Definitions

Summary

Bibliography

Introduction

Commodities

A physical substance, such as food, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be. This would also include foreign currencies and financial instruments and indexes. One of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining. There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store; hence, electricity must be consumed as soon as it is produced.

Commodities Market

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed upon price on a specific date.

Commodities Exchange

A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

Commodities Futures

A Commodity futures is an agreement between two parties to buy or sell a specified and standardized quantity of a commodity at a certain time in future at a price agreed upon at the time of entering into the contract on the commodity futures exchange. The need for a futures market arises mainly due to the hedging function that it can perform. Commodity markets, like any other financial instrument, involve risk associated with frequent price volatility. The loss due to price volatility can be attributed to the following reasons: Consumer Preferences: - In the short-term, their influence on price volatility is small since it is a slow process permitting manufacturers, dealers and wholesalers to adjust their inventory in advance. Changes in supply: - They are abrupt and unpredictable bringing about wild fluctuations in prices. This can especially noticed in agricultural commodities where the weather plays a major role in affecting the fortunes of people involved in this industry. The futures market has evolved to neutralize such risks through a mechanism; namely hedging. The objectives of Commodity futures: Hedging with the objective of transferring risk related to the possession of physical assets through any adverse moments in price. Liquidity and Price discovery to ensure base minimum volume in trading of a commodity through market information and demand supply factors that facilitates a regular and authentic price discovery mechanism.

Maintaining buffer stock and better allocation of resources as it augments reduction in inventory requirement and thus the exposure to risks related with price fluctuation declines. Resources can thus be diversified for investments.

Price stabilization along with balancing demand and supply position. Futures trading leads to predictability in assessing the domestic prices, which maintains stability, thus safeguarding against any short term adverse price movements. Liquidity in Contracts of the commodities traded also ensures in maintaining the equilibrium between demand and supply. Flexibility, certainty and transparency in purchasing commodities facilitate bank financing. Predictability in prices of commodity would lead to stability, which in turn would eliminate the risks associated with running the business of trading commodities. This would make funding easier and less stringent for banks to commodity market players.

Need

The diversification benefits equal or surpass those of other asset classes like fixed income and real estate. The primary reason for this is their correlation, or lack thereof, to the stock market as represented by the S&P 500 (Correlation describes how similar the price movement is between two investments). Commodities have historically exhibited absolutely no correlation whatsoever to the stock market or any of the bond market indices. In fact, they have a negative correlation. This non-similar pattern of performance allows an investor to minimize volatility and protect capital in down markets. Overall, these factors help to decrease overall risk in a portfolio of investments. This is not to say that this asset class has not earned a spot in a well-diversified portfolio. It has. At a time when stocks and bonds are predicted by most academics and investment gurus such as Warren Buffet, Bill Gross of PIMCO, and Jeremy Grantham of Grantham, Mayer, and Van Otterloo, to produce 5.0% returns or less over the next decade due to historically high market valuations. With commodities being inexpensively priced, substantial upside potential is possible. U.S. inflation is historically low right now but with the effects of massive fiscal and monetary policy colliding with expected interest rate increases and already robust consumer spending, undoubtedly raw goods prices will inevitably increase. When they do, commodity indices will no doubt follow suit. As inflation gradually rises in 2004 and 2005, industrial metals prices will rise as investors begin to direct large amounts of money into these hard asset commodities. The high correlation between commodities and inflation provide an important hedge against considerable losses in traditional financial instruments such as stocks and bonds. Commodities also provide a tactical play on the current weakness in the Dollar. As other currencies such as the Euro and Yen appreciate versus the dollar, foreign buyers can buy fewer goods with the same amount of currency. This artificially increases demand, and subsequently

drives up the prices of commodities. Currently, effects of this phenomenon can be seen best in the gold and silver markets as prices have risen dramatically over the past year. Commodities provide a play on globalization by their ability to aid in the improvement of the global economy. This is due to the fact that prices for industrial materials will increase as demand for industrial goods increase. As countries such as China and other emerging market economies develop, they will require more raw staples. This is especially true for industrial metals. China continues to develop at a rapid pace and consequently, their demand for raw materials continues to rise. In fact, Chinas iron ore demand has increased from 5% of the worlds supply to almost 50% over the past twelve years. Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. Till some months ago, this wouldn't have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver -- or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on. Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid.

Benefits Benefits of Commodity Futures Markets:The primary objectives of any futures exchange are authentic price discovery and an efficient price risk management. The beneficiaries include those who trade in the commodities being offered in the exchange as well as those who have nothing to do with futures trading. It is because of price discovery and risk management through the existence of futures exchanges that a lot of businesses and services are able to function smoothly.

Price Discovery:-Based on inputs regarding specific market information, the demand and supply equilibrium, weather forecasts, expert views and comments, inflation rates, Government policies, market dynamics, hopes and fears, buyers and sellers conduct trading at futures exchanges. This transforms in to continuous price discovery mechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

Price Risk Management: - Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by taking an equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importers etc.

Import- Export competitiveness: - The exporters can hedge their price risk and improve their competitiveness by making use of futures market. A majority of traders which are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedge their proposed purchase by temporarily substituting for actual purchase till the time is ripe to buy in physical market. In the absence of futures market it will be meticulous, time consuming and costly physical transactions.

Predictable Pricing: - The demand for certain commodities is highly price elastic. The manufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability in domestic

prices. The manufacturers can, as a result, smooth out the influence of changes in their input prices very easily. With no futures market, the manufacturer can be caught between severe shortterm price movements of oils and necessity to maintain price stability, which could only be possible through sufficient financial reserves that could otherwise be utilized for making other profitable investments.

Benefits for farmers/Agriculturalists: - Price instability has a direct bearing on farmers in the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associated with the marketing or processing margins enabling more returns on produce. Storing more and being more active in the markets. The price information accessible to the farmers determines the extent to which traders/processors increase price to them. Since one of the objectives of futures exchange is to make available these prices as far as possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated by futures exchanges would be crucial for their production decisions.

Credit accessibility: - The absence of proper risk management tools would attract the marketing and processing of commodities to high-risk exposure making it risky business activity to fund. Even a small movement in prices can eat up a huge proportion of capital owned by traders, at times making it virtually impossible to pay back the loan. There is a high degree of reluctance among banks to fund commodity traders, especially those who do not manage price risks. If in case they do, the interest rate is likely to be high and terms and conditions very stringent. This posses a huge obstacle in the smooth functioning and competition of commodities market. Hedging, which is possible through futures markets, would cut down the discount rate in commodity lending.

Improved product quality: - The existence of warehouses for facilitating delivery with grading facilities along with other related benefits provides a very strong reason to upgrade and enhance the quality of the commodity to grade that is acceptable by the exchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certified warehouses have the potential to become the norm for physical trade.

History

The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade. Commodities future trading was evolved from need of assured continuous supply of seasonal agricultural crops. The concept of organized trading in commodities evolved in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice. These were known as rice tickets. Eventually, these rice tickets become accepted as a kind of commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets. In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to lack of organized storage facilities, absence of uniform weighing & grading mechanisms producers often confined to the mercy of dealers discretion. These situations lead to need of establishing a common meeting place for farmers and dealers to transact in spot grain to deliver wheat and receive cash in return. Gradually sellers & buyers started making commitments to exchange the produce for cash in future and thus contract for futures trading evolved. Whereby the producer would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In this way producer was aware of what price he would fetch for his produce and dealer would know about his cost involved, in advance. This kind of agreement proved beneficial to both of them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to someone who needs the same. Similarly producer who not intended to deliver his produce to dealer could pass on the same responsibility to someone else. The price of such contract would dependent on the price movements in the wheat market. Latter on by making some modifications these contracts transformed in to an instrument to protect involved parties against adverse factors such as unexpected price movements and unfavorable climatic factors. This promoted traders entry in futures market, which had no intentions to buy or sell wheat but would purely speculate on price movements in market to earn profit. Trading of wheat in futures became very profitable which encouraged the entry of other commodities in futures market. This created a platform for establishment of a body to

regulate and supervise these contracts. Thats why Chicago Board of Trade (CBOT) was established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges were born. Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The largest commodity exchange in USA is Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand Early history of commodity markets Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable. Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery - this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.

Size of the market The trading of commodities consists of direct physical trading and derivatives trading. Exchange traded commodities have seen an upturn in the volume of trading since the start of the decade. This was largely a result of the growing attraction of commodities as an asset class and a proliferation of investment options which has made it easier to access this market. The global volume of commodities contracts traded on exchanges increased by a fifth in 2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding value of OTC commodities derivatives declined by two-thirds as investors reduced risk following a fivefold increase in value outstanding in the previous three years. Trading on exchanges in China and India has gained in importance in recent years due to their emergence as significant commodities consumers and producers. China accounted for more than 60% of exchange-traded commodities in 2009, up on its 40% share in the previous year. Commodity assets under management more than doubled between 2008 and 2010 to nearly $380bn. Inflows into the sector totaled over $60bn in 2010, the second highest year on record, down from the record $72bn allocated to commodities funds in the previous year. The bulk of funds went into precious metals and energy products. The growth in prices of many commodities in 2010 contributed to the increase in the value of commodities funds under management.

Financial Market and Commodity Market

Difference between Financial and Commodity Market

The difference lies in the item that is being traded. F> In the financial market, stocks and mutual funds are traded. C> Whereas in the commodity market, commodities like gold, coal, rice are traded.

2.) F>Ownership in companies is traded in the financial market. C> Ownership of raw, unprocessed goods is traded in the commodity market.

3.) Regulating body of both the types of market-finance-SEBI, commodities-

4.) F>Trading is limited to the operating time in financial market. C>There is no limitation of timing in the commodity market.

5.) F>Speculation can be more precise in the financial market. C>It is difficult to predict the future situation in the commodity market.

6.) F>Financial assets are not bulky; they do not need special facility for storage physical settlement.

case of

C>On the other hand, due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing.

7.) F>the concept of varying quality of asset does not really exist as far as financial underlying are concerned.

C> In the case of commodities, the quality of the asset underlying a contract can vary largely.

8.) The process of taking physical delivery in commodities is quite different from the process of taking physical delivery in financial assets. Unlike in the case of equity futures, typically a seller of commodity futures has the option to give notice of delivery.

9.) One of the main differences between financial and commodity derivative is the need for warehousing. F>In case of most exchange-traded financial derivatives, all the positions are cash settled. C>In case of commodity derivatives however, there is a possibility of physical settlement.

10.) A derivatives contract is written on a given underlying. F>Variance in quality is not an issue in case of financial derivatives as the physical attribute is missing. C>When the underlying asset is a commodity, the quality of the underlying asset is of prime

importance.

Indian Commodity Market and Global Commodity Market

Difference between Indian and Global Commodity Market

before discussing the difference between the Indian and Global commodity market, its better to have a understanding of the stand of India in this world commodity market.

SR. NO 1

Indian commodity market

Global commodity market

6 7

8 9 10

11

12

13

14

India does not have a calibrated policy The US and the European market framework for commodity market have pretty good calibrated framework. India has less commodity-intensive growth China, Russia, Brazil have better profile compared to other growing powerhouse commodity intensive growth profile like china. as compared to India. Indian demand for crude oil has accelerated and Leaving the middle east and the US, the consumption of oil will be at its peak in the almost all other countries are large coming decade. importer of crude oil. India is quite vulnerable to global commodity Comparatively, the macro economic prices. Our whole macro economic framework framework of other countries in the comes under pressure if commodity prices surge, BRIC is better which allows them to with the current account, fiscal balance and be less vulnerable to global prices. inflation all under stress. The pricing mechanism needs reform for the There is a good pricing mechanism in commodity market the European market and US. However, in the developing countries like China, it needs reform. Indias energy efficiency is pathetic Globally, the energy efficiency is better. In agriculture, producers do not receive true and In the European market and US remunerative market-based prices commodity market, the manufacturer gets remunerative market based price. Indias yields are well below global averages for Global average yields are high most crops except cotton compared to India. India has plenty of scope for technological inputs The farm level economics have been to lift yields and boost farm-level economics rising more rapidly globally. India takes nine or ten years to operationalise The time to operationalise a mine is mines. shorter in other countries as the legal framework is better organized The absence of formalized mining bill Almost all major countries (other than China and Brazil) commodity trading countries have a mining bill. In other commodities like iron ore and coal, we Reverse scenario in global market have huge reserves, but again a very poor policy where the resourese are used framework in place. optimally. The whole approach towards the allocation of Its more transparent in the developed mineral resources is opaque and open to abuse countries where proper accountable disclosures are made. We do not seem to have a holistic commodity Other BRIC countries do have a security strategy in place. holistic commodity security strategy

15

16

in place. Our policy framework is inadequate to ensure the European countries are active in full and effective utilization of domestic ensuring long-term access to key raw resources, and we do not have the infrastructure materials or global assets to ensure uninterrupted access to critical raw materials India is also an important consumer of In comparison, China consumes 13 commodities, ranking fifth in overall energy use percent of the worlds energy, and third largest consumer of coal. including nearly one-third of the Worlds coal output.

Commodities Traded

Active

Commodities

(Global

market)

There are many agricultural and industrial commodities now being traded in the commodities market. The list of the most common commodities and the exchanges they are normally dealt through are given below: The most commonly traded commodity is Crude Oil, and its various derivatives such as heating oil and gasoline. These commodities are mostly traded in the New York Mercantile Exchange [NYMEX], ICE Futures, the Dubai Mercantile Exchange [DME] and the Central Japan Commodity Exchange [C-COM]. The second most traded commodity is Coffee [value wise]. Coffee is mainly traded through the New York Board of Trade [NYBOT], the Kansai Commodities Exchange [in Osaka, Japan], the Singapore Commodities Exchange [SICOM] and Euronext [London]. Common commodities in agriculture include wheat, corn, maize, oats, rice, soybeans and they are traded in the Chicago Board of Trade [CBOT], the Kansai Commodities Exchange [in Osaka, Japan], the Risk Management Exchange [RMX-in Hannover], the Minneapolis Grain Exchange, the Winnipeg Commodity Exchange [WCE], The Tokyo Grain Exchange [TGE] and Euronext. Animals and animal products such as live and feeder cattle, beef, frozen and fresh pork bellies, and eggs are mainly traded in the Chicago Mercantile Exchange [CME], Euronext, the Risk Management Exchange [RMX-in Hannover] and the Central Japan Commodity Exchange [C-COM]. Items like cocoa, butter, orange juice and sugar are also commonly traded in the New York Board of trade [NYBOT] and Euronext. Metals such as aluminum, nickel, copper, lead and ferrous scrap are mainly traded in the New York Mercantile Exchange [NYMEX], the London Metal Exchange [LME], the Shangai Futures Exchange [SFE], the Central Japan Commodities Exchange, Hedgestreet Exchange [in California], and the Tokyo Commodities Exchange [TOCOM]. The other commonly traded commodities are precious metals such as gold, silver and platinum and they are traded in the New York Mercantile Exchange [NYMEX], the Brazilian Mercantile and Futures Exchange [BMF], the Dubai Gold and Commodities Exchange [DGCX], the National Commodity Exchange Limited [in Karachi, Pakistan] and the Tokyo Commodities Exchange[TOCOM]. Plastic is traded in the London Metal Exchange [LME] and the Dalian Community Exchange [DCE-China]

Natural gas is traded in the New York Mercantile Exchange [NYMEX] and ICE Futures List of traded commodities Agricultural (grains, and food and fiber) Commodity Corn Corn Oats Rough Rice Soybeans Rapeseed Soybean Meal Soybean Oil Wheat Milk Main Exchange CBOT EURONEXT CBOT CBOT CBOT EURONEXT CBOT CBOT CBOT Contract Size 5000 bu 50 tons 5000 bu 2000 cwt 5000 bu 50 tons 100 short tons 60,000 lb 5000 bu Mercantile 200,000 lbs 10 tons 37,500 lb 50,000 lb 112,000 lb 112,000 lb 15,000 lbs Trading Symbol C/ZC (Electronic) EMA O/ZO (Electronic) RR S/ZS (Electronic) ECO SM/ZM (Electronic) BO/ZB (Electronic) W/ZW (Electronic) DC CC KC CT SB SE FCOJ-A

Chicago Exchange Cocoa ICE Coffee C ICE Cotton No.2 ICE Sugar No.11 ICE Sugar No.14 ICE Frozen Concentrated Orange ICE Juice

Livestock and meat Commodity Lean Hogs Contract Size lb lb lb lb Currency Main Exchange Chicago Exchange Chicago Exchange Chicago Exchange Chicago Exchange Trading Symbol Mercantile LH Mercantile PB Mercantile LC Mercantile FC

40,000 tons) Frozen Pork 40,000 Bellies tons) Live Cattle 40,000 tons) Feeder Cattle 50,000 tons)

(20 USD ($) (20 USD ($) (20 USD ($) (25 USD ($)

Energy Commodity WTI Crude Oil Main Exchange NYMEX, ICE ICE Contract Size 1000 bbl (42,000 U.S. gal) 1000 bbl (42,000 U.S. gal) 29,000 U.S. gal Trading Symbol CL (NYMEX), WTI (ICE) B

Brent Crude

Ethanol Natural Gas Heating Oil

CBOT NYMEX NYMEX

Gulf Coast Gasoline

NYMEX

RBOB Gasoline gasoline blendstock blending) Propane

(reformulated NYMEX for oxygen NYMEX

Purified Terephthalic Acid (PTA) Precious metals Commodity Gold Platinum Palladium Silver Unit troy ounce troy ounce troy ounce troy ounce Currency USD ($) USD ($) USD ($) USD ($)

ZCE

AC (Open Auction) ZE (Electronic) 10,000 mmBTU NG 1000 bbl HO (42,000 U.S. gal) 1000 bbl LR (42,000 U.S. gal) 1000 bbl RB (42,000 U.S. gal) 1000 bbl PN (42,000 U.S. gal) 5 Tons TA

Main Exchange NYMEX NYMEX NYMEX NYMEX

Industrial metals Commodity Copper Lead Zinc Tin Aluminum Aluminum alloy Unit Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Metric Ton Currency USD ($) USD ($) USD ($) USD ($) USD ($) USD ($) Main Exchange London Metal Exchange, New York London Metal Exchange London Metal Exchange London Metal Exchange London Metal Exchange, New York London Metal Exchange

Nickel Cobalt Molybdenum Recycled steel Rare metals

Metric Ton Metric Ton Metric Ton Metric Ton

USD ($) USD ($) USD ($) USD ($)

London Metal Exchange London Metal Exchange London Metal Exchange Rotterdam (source?)

The following metals are not, at present, traded on any exchange, such as the London Metal Exchange (LME), and, therefore, no spot or futures market, where producers, consumers and traders can fix an official or settlement price exists for these metals The only price information that is available globally is published by, among others, London-based Metal Bulletin and is based on information from producers, consumers and traders. Germanium, Cadmium, Chromium, Magnesium, Manganese, Silicon, Rhodium, Selenium, Titanium, Vanadium, Wolframite, Niobium, Lithium, Indium, Gallium, Tantalum, Tellurium, and Beryllium. [The following minerals and materials are not, at present (2008), traded on any exchange, and, therefore, no spot or futures market where producers, consumers and traders can fix an official or settlement price exists for these minerals. Generally the only price information that is available globally is published privately by, among others, the London Metal Bulletin and is based on information from producers, consumers and traders. Asphalt, Aggregate, Arsenic, Borax, Boron, Gypsum, Asbestos, Chlorine, Fluoride, Cement, Sulfuric Acid, Carbon Dioxide, Fluorspar, Bromine, and Titanium Dioxide. Agricultural products The following agricultural products are not, at present (2008), traded on any exchange, and, therefore, no spot or futures market where producers, consumers and traders can fix an official or settlement price exists for these minerals. Generally the only price information that is available is based on information from producers, consumers and traders. Fresh Flowers, Cut Flowers, Melons, Lemons, Tung Oil, Gum Arabic, Pine Oil, Xanthan, Tomatoes, Grapes, Eggs, Potatoes, and Figs. Other Commodity Rubber Palm Oil Wool Polypropylene Unit 1 kg Currency US cents () Bourse *Singapore Commodity Exchange Ringgit Bursa Malaysia ASX London Metal Exchange

1000 kg Malaysian (RM) 1 kg AUD ($) 1000 kg USD ($)

Linear Low Density 1000 kg USD ($) London Metal Exchange Polyethylene (LL) In 2007, steel began being traded as a commodity in the London Metal Exchange. Environmental commodities In the last decade, a number of environmental commodities have been created. These include carbon offsets, Renewable Energy Certificates, and white certificates (energy efficiency credits). Active commodity market (Indian Commodity Market) Majority of commodities traded on global commodity exchanges are agro-based. Commodity markets therefore are of great importance and hold a great potential in case of economies like India, where more than 65 percent of the people are dependent on agriculture.

Despite having a robust economy, India's share in the global commodity market is not as big as estimated. Except gold the share in other sectors of the commodity market is not very significant. India accounts for 3% of the global oil demands and 2% of global copper demands. In agriculture India's contribution to international trade volume is rather less compared to the huge production base available. Various infrastructure development projects that are being undertaken in India are being seen as a key growth driver in the coming days. There is a huge domestic market for commodities in India since India consumes a major portion of its agricultural produce locally. Indian commodities market has an excellent growth potential and has created good opportunities for market players. India is the worlds leading producer of more than 15 agricultural commodities and is also the worlds largest consumer of edible oils and gold. It has major markets in regions of urban conglomeration (cities and towns) and nearly 7,500+ Agricultural Produce Marketing Cooperative (APMC) mandis. To add to this, there is a network of over 27,000+ haats (rural bazaars) that are seasonal marketplaces of various commodities. These marketplaces play host to a variety of commodities every day. The commodity trade segment employs more than five million traders. The potential of the sector has been well identified by the Central government and the state governments and they have invested substantial resources to boost production of agricultural commodities. Many of these commodities would be traded in the futures markets as the food-processing industry grows at a phenomenal pace. Trends indicate that the volume in futures trading tends to be 5-7 times the size of spot trading in the country (internationally, it is much higher at 15 to 20 times). Many nationalized and private sector banks have announced plans to disburse substantial amounts to finance businesses related to commodity trading. The Government of India has initiated several measures to stimulate active trading interest in commodities. Steps like lifting the ban on futures trading in commodities, approving new exchanges, developing exchanges with modern infrastructure and systems such as online trading, and removing legal hurdles to attract

more participants have increased the scope of commodities derivatives trading in India. This has boosted both the spot market and the futures market in India. The trading volumes are increasing as the list of commodities traded on national commodity exchanges also continues to expand. The volumes are likely to surge further as a result of the increased interest from the international participants in Indian commodity markets. If these international participants are allowed to participate in commodity markets (like in the case of capital markets), the growth in commodity futures can be expected to be phenomenal. It is expected that foreign institutional investors (FIIs), mutual funds, and banks may be able to participate in commodity derivatives markets in the near future. The launch of options trading in commodity exchanges is also expected after the amendments to the Forward Contract Regulation Act (1952). Commodity trading and commodity financing are going to be rapidly growing businesses in the coming years in India. Indian Commodity Study AGRO PRODUCTS Basmati Rice Castor Oil Gaur Gur Peas Pepper Sugar Turmeric

Chana Jeera Red Chilli Urad

Coffee Jute Rice Wheat

Cotton Maize Rubber -

Crude Oil Mustard Soyabean -

METALS Copper

Gold

Silver

Steel

With the liberalization of the Indian economy in 1991, the commodity prices (especially international commodities such as base metals and energy) have been subject to price volatility in international markets, since India is largely a net importer of such commodities. Commodity derivatives exchanges have been established with a view to minimize risks associated with such price volatility.

India is among top 5 producers of most of the Commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% GDP of Indian economy. It employees around 57% of the labor force on total of 163 million hectors of land Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives. Trends in volume contribution on the three National Exchanges:Pattern on Multi Commodity Exchange (MCX). MCX is currently largest commodity exchange in the country in terms of trade volumes, further it has even become the third largest in bullion and second largest in silver future trading in the world. Coming to trade pattern, though there are about 100 commodities traded on MCX, only 3 or 4

commodities contribute for more than 80 percent of total trade volume. As per recent data the largely traded commodities are Gold, Silver, Energy and base Metals. Incidentally the futures trends of these commodities are mainly driven by international futures prices rather than the changes in domestic demand-supply and hence, the price signals largely reflect international scenario. Among Agricultural commodities major volume contributors include Gur, Urad, Mentha Oil etc. Pattern on National Commodity & Derivatives Exchange (NCDEX) NCDEX is the second largest commodity exchange in the country after MCX. However the major volume contributors on NCDEX are agricultural commodities. But, most of them have common inherent problem of small market size, which is making them vulnerable to market manipulations and over speculation. About 60 percent trade on NCDEX comes from guar seed, chana and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange (NMCE) NMCE is third national level futures exchange that has been largely trading in Agricultural Commodities. Trade on NMCE had considerable proportion of commodities with big market size as jute rubber etc. But, in subsequent period, the pattern has changed and slowly moved towards commodities with small market size or narrow commodities.

Analysis of volume contributions on three major national commodity exchanges reveled the following pattern, Major volume contributors: Majority of trade has been concentrated in few commodities that are Non Agricultural Commodities (bullion, metals and energy) Agricultural commodities with small market size (or narrow commodities) like guar, Urad, Mentha etc.

Commodities trading
Spot trading Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.

Forward contracts A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price. Futures contracts A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and futures contracts are based on whats termed forward contracts. Early on these forward contracts agreements to buy now, pay and deliver later were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the price. Hedging Hedging, a common practice of farming cooperatives insures against a poor harvest by purchasing futures contracts in the same commodity. If the cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions.

Special Commodities Traded

Water as a Commodity
Global shortages of water could lead to the precious liquid being exchanged in a similar way to permission schemes used by countries for carbon dioxide, the head of one of the worlds leading exchanges said yesterday. Craig Donohue, chief executive of the Chicago Mercantile Exchange (CME), said that water could become a commodity as droughts and demand place huge pressures on river systems and water tables. Trading water as a commodity would, it is argued, put financial pressure on users to keep consumption down, in the same way that carbon emission trading schemes penalise the biggest polluters. It would be a market-based mechanism to force greater efficiency among business users by penalising heavy consumption. While offering a lucrative option for traders, the market would be designed to reduce the pressures that are already said to have contributed to war and starvation. How it would work A water future would be an agreement to buy or sell a certain number of litres of water at a pre-agreed price on a certain date Futures are priced, like shares, with a bid and an offer price bid being the price at which a trader is willing to buy a futures contract and offer being the price at which they are willing to sell They are used to hedge against risk. In the case of water, risk that water would not be available They are also used for speculating. A speculator might invest in water futures in the hope that farmers would need it in the summer and be prepared to pay more If a farmer wanted to protect himself against rising water prices, he would buy futures to cover the amount he is likely to need Information on the availability of water in local storage facilities would help buyers and sellers to determine the risk of water shortages and therefore the price of the asset There are now, however, several water-sector tracking indexes available to help address just this issue: the ISE Water Index (HHO), the Palisades Water Indices (PIIWI and ZWI) and the S&P Global Water Index (SPGTAQUA). Backtested data on each of these stocks shows water has been a strong-performing theme already; moreover, water stocks have had only

a weak correlation to the S&P 500, and have been negatively correlated with other commodities, making them a strong diversification option for new portfolios. These indexes are currently investable' through four different exchange-traded funds, or ETFs: First Trust ISE Water (FIW), Powershares Global Water (PIO), Powershares Water Resources (PHO) and Claymore S&P Global Water (CGW). Indexes Like any other scarcity, the water shortage creates investment opportunities. Here are some of the more popular indexes designed to track various water-related investment opportunities: Palisades Water Index - This index was designed to track the performance of companies involved in the global water industry, including pump and filter manufacturers, water utilities and irrigation equipment manufacturers. The index was set at 1000 as of December 31, 2003 and not even 10 years later is has fluctuated around the 2,000 mark. Dow Jones U.S. Water Index - Composed of approximately 29 stocks, this barometer is comprised of a large number of international and domestic companies which are affiliated with the water business and have a minimum market capitalization of $150 million. ISE-B&S Water Index - Launched in January 2006, this index represents water distribution, water filtration, flow technology and other companies that specialize in water-related solutions. It contains over 35 stocks. S&P 1500 Water Utilities Index - A sub-sector of the Standard & Poor's 1500 Utilities Index, this index is composed of just two companies, American States Water (NYSE:AWR) and Aqua America (NYSE: WTR) . The Bloomberg World Water Index and the MSCI World Water Index provide a look at the water industry from an international perspective, although it can be rather difficult to find current information about either index. There are also a variety of utility indexes that include some water stocks. Conclusion Recent years have seen an upswing in the demand for investments that seek to profit from the need for fresh, clean water. If the trend continues, and by all indications it will, investors can expect to see a host of new investments that provide exposure to this precious commodity and to the firms that deliver it to the marketplace. There are currently numerous ways to add water exposure to your portfolio - most simply require a bit of research. Just as with any other investment in commodities or sector funds, wise investors should limit their exposure to water. Generally speaking, highly concentrated investments such as these should not represent more than 10% of the assets in a well-diversified portfolio. Limiting

exposure to concentrated positions provides some opportunity to capture positive returns while limiting overall portfolio volatility.

Carbon offset
A carbon offset is a reduction in emissions of carbon dioxide or greenhouse gases made in order to compensate for or to offset an emission made elsewhere. Carbon offsets are measured in metric tons of carbon dioxide-equivalent (CO2e) and may represent six primary categories of greenhouse gases. The categories include: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydroflourocarbons (HFCs), and sulfur hexaflouride (SF6). One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. The World Resources Institute defines a carbon offset as a unit of carbon dioxide-equivalent (CO2e) that is reduced, avoided, or sequestered to compensate for emissions occurring elsewhere. The Collins English Dictionary defines a carbon offset as a compensatory measure made by an individual or company for carbon emissions, usually through sponsoring activities or projects which increase carbon dioxide absorption, such as tree planting. The Environment Protection Authority of Victoria (Australia) defines a carbon offset as: a monetary investment in a project or activity elsewhere that abates greenhouse gas (GHG) emissions or sequesters carbon from the atmosphere that is used to compensate for GHG emissions from your own activities. Offsets can be bought by a business or individual in the voluntary market (or within a trading scheme), a carbon offset usually represents one tonne of CO2-e. The Stockholm Environment Institute defines a carbon offset as a credit for negating or diminishing the impact of emitting a ton of carbon dioxide by paying someone else to absorb or avoid the release of a ton of CO2 elsewhere. The University of Oxford Environmental Change Institute defines a carbon offset as mechanism whereby individuals and corporations pay for reductions elsewhere in order to offset their own emissions.

Renewable Energy Certificates (United States)

Renewable Energy Certificates (RECs), also known as Green tags, Renewable Energy Credits, Renewable Electricity Certificates, or Tradable Renewable Certificates (TRCs), are tradable, non-tangible energy commodities in the United States that represent proof that 1

megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource (renewable electricity). Solar Renewable Energy Certificates (SRECs) are RECs that are specifically generated by solar energy. These certificates can be sold and traded or bartered, and the owner of the REC can claim to have purchased renewable energy. According to the U.S. Department of Energy's Green Power Network, RECs represent the environmental attributes of the power produced from renewable energy projects and are sold separate from commodity electricity. While traditional carbon emissions trading programs promote low-carbon technologies by increasing the cost of emitting carbon, RECs can incentivize carbon-neutral renewable energy by providing a production subsidy to electricity generated from renewable sources. It is important to understand that the energy associated with a REC is sold separately and is used by another party. The consumer of a REC receives only a certificate. In states that have a REC program, a green energy provider (such as a wind farm) is credited with one REC for every 1,000 kWh or 1 MWh of electricity it produces (for reference, an average residential customer consumes about 800 kWh in a month). A certifying agency gives each REC a unique identification number to make sure it doesn't get double-counted. The green energy is then fed into the electrical grid (by mandate), and the accompanying REC can then be sold on the open market.

White certificates
In environmental policy, white certificates are documents certifying that a certain reduction of energy consumption has been attained. In most applications, the white certificates are tradable and combined with an obligation to achieve a certain target of energy savings. Under such a system, producers, suppliers or distributors of electricity, gas and oil are required to undertake energy efficiency measures for the final user that are consistent with a pre-defined percentage of their annual energy deliverance. If energy producers do not meet the mandated target for energy consumption they are required to pay a penalty. The white certificates are given to the producers whenever an amount of energy is saved whereupon the producer can use the certificate for their own target compliance or can be sold to (other) parties who cannot meet their targets. Quite analogous to the closely related concept of emissions trading, the tradability in theory guarantees that the overall energy saving is achieved at least cost, while the certificates guarantee that the overall energy saving target is achieved. A white certificate, also referred to as an Energy Savings Certificate (ESC), Energy Efficiency Credit (EEC), or white tag, is an instrument issued by an authorized body guaranteeing that a specified amount of energy savings has been achieved. Each certificate is a unique and traceable commodity carrying a property right over a certain amount of additional energy savings and guaranteeing that the benefit of these savings has not been accounted for elsewhere.

Procedure for trading

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. This allows him to ask for physical delivery of the good from the warehouse. But someone trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: - At this stage the following is the system implementedOrder receiving Execution Matching Reporting Surveillance Price limits Position limits II. Clearing: - This stage has following system in placeMatching Registration Clearing Clearing limits Notation Margining Price limits Position limits Clearing house. III. Settlement: - This stage has following system followed as followsMarking to market Receipts and payments Reporting Delivery upon expiration or maturity.

Delivery and condition guarantees In addition, delivery day, method of settlement and delivery point must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point. Standardization U.S. soybean futures, for example, are of standard grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Indiana, Ohio and Michigan origin produced in the U.S.A. (Non-screened, stored in silo)," and of deliverable grade if they are "GMO or a mixture of GMO and Non-GMO No. 2 yellow soybeans of Iowa, Illinois and Wisconsin origin produced in the U.S.A. (Non-screened, stored in silo)." Note the distinction between states, and the need to clearly mention their status as GMO (Genetically Modified Organism) which makes them unacceptable to most organic food buyers. Similar specifications apply for cotton, orange juice, cocoa, sugar, wheat, corn, barley, pork bellies, milk, feedstuffs, fruits, vegetables, other grains, other beans, hay, other livestock, meats, poultry, eggs, or any other commodity which is so traded How an investor get started with trading: Choose Brokers Many already established equity brokers have sought membership with MCX. Check out the list of commodity brokers Minimum Investment Amount The minimum investment amount is approximately Rs. 6, 000. It varies for different commodities. For example, if you want to trade on Mini gold (100g), you need approximately Rs. 8, 000/- and for Mini zinc, you need ~ Rs. 5, 500. But starting your trading with Rs. 10, 000 will be ideally good. Transferring money to trade You can directly deposit to Brokers company account, Netbanking, Demand draft and cheques are all possible ways. Most of the brokers will allow all the above mentioned options, only few brokers have restricted cheques. Basic things to open trading account Bank account PAN Card Address Proof Note: The brokers will charge Rs. 250 to 500 for opening the trading account.

Basic needs for Trading All you need is Internet connection and trading application. Dont bother about trading application, brokers will install it to your computer and they will guide you to operate the platform, even brokers give you daily tips. But premium tips are always best and also you can gain more. Trading Time MCX will open at 10 AM and will close at 11.30 PM. Within these times you can trade.

With whom investor can transact a business? An investor can transact a business with the approved clearing member of previously mentioned Commodity Exchanges. The investor can ask for the details from the Commodity Exchanges about the list of approved members.

What is Identity Proof? When investor approaches Clearing Member, the member will ask for identity proof. For which Xerox copy of any one of the following can be given PAN card Number, Driving License, Vote ID, Passport What statements should be given for Bank Proof? The front page of Bank Pass Book and a canceled cheque of a concerned bank. Otherwise the Bank Statement containing details can be given. What are the particulars to be given for address proof? In order to ascertain the address of investor, the clearing member will insist on Xerox copy of Ration card or the Pass Book/ Bank Statement where the address of investor is given. What are the other forms to be signed by the investor? The clearing member will ask the client to sign Know your client form Risk Discloser Document The above things are only procedure in character and the risk involved and only after understanding the business, he wants to transact business. What aspects should be considered while selecting a commodity broker?

While selecting a commodity broker investor should ideally keep certain aspects in mind to ensure that they are not being missed in any which way. These factors include Net worth of the broker of brokerage firm. The clientele. The number of franchises/branches. The market credibility. The references. The kind of service provided- back office functioning being most important. Credit facility. The research team. These are amongst the most important factors to calculate the credibility of commodity broker. Explaining the trading through F.A.Qs Where do I need to go to trade in commodity futures? You have three options - the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence. How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect), ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures services. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from. What is the minimum investment needed? You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other brokers have different packages for clients.

For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one kg). The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000. Do I have to give delivery or settle in cash? You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item. If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract. What do I need to start trading in commodity futures? As of now you will need only one bank account. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks. What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc. What are the brokerage and transaction charges? The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges. Where do I look for information on commodities? Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support.

But the information easiest to access is from websites. Though many websites are subscriptionbased, a few also offer information for free. You can surf the web and narrow down you search. Who is the regulator? The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator. The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially. Who are the players in commodity derivatives? The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite. For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes. In which commodities can I trade? Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading. Do I have to pay sales tax on all trades? Is registration mandatory? No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax.

The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number. What happens if there is any default? Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges. Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods? Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery. Is stamp duty levied in commodity contracts? What are the stamp duty rates? As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market. How much margin is applicable in the commodities market? As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility. Are there circuit filters? Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity

Regulation for trading

A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts. Commodities exchanges across the world Africa Exchange Abbreviation Ethiopia Commodity ECX Exchange Africa Mercantile AfMX Exchange Location Product Types Addis Ababa, Agricultural Ethiopia Nairobi, Kenya Agricultural,equities and energy products

Americas Exchange Brazilian Mercantile and Futures Exchange Chicago Board of Trade (CME Group) Chicago Mercantile Exchange (CME Group) Chicago Climate Exchange HedgeStreet Exchange Intercontinental Exchange Integrated Nano-Science Commodity Exchange Kansas City Board of Trade Memphis Cotton Exchange Mercado a Termino de Buenos Aires Mercado a Termino de Rosario Minneapolis Grain Exchange New York Mercantile Exchange (CME Group) U.S. Futures Exchange Abbreviation Location BMF So Paulo, Brazil CBOT CME CCX ICE INSCX KCBT MATba ROFEX MGEX NYMEX USFE Product Types Agricultural, Biofuels, Precious Metals Chicago, US Grains, Ethanol, Treasuries, Equity Index, Metals Chicago, US Meats, Currencies, Eurodollars, Equity Index Chicago, US Emissions California, US Energy, industrial Metals Atlanta, Georgia, Energy, Emissions, US Agricultural, Biofuels United Kingdom Engineered nanomaterials Kansas City, US Memphis, US Buenos Aires, Argentina Rosario, Argentina Minneapolis New York, US Chicago, US Agricultural Agricultural Agricultural Financial, Agricultural Agricultural Energy, Precious Industrial Metals Energy

Metals,

Asia Exchange Agricultural Futures Exchange of Thailand Bursa Malaysia Cambodian Mercantile Exchange Central Japan Commodity Exchange Dalian Commodity Exchange Dubai Mercantile Exchange Dubai Gold & Commodities Exchange Hong Kong Mercantile Exchange Iranian oil bourse Kansai Commodities Exchange Commodities & Metal Exchange Nepal Ltd. National Spot Exchange Limited Nepal Derivative Exchange Limited National Spot Exchange Limited Nepal Mercantile Exchange Nepal Limited Abbreviation AFET Location Bangkok Thailand Product Types Agricultural

MDEX CMEX

Malaysia Biofuels Phnom Penh, Energy, Industrial Metals, Rubber, Cambodia Precious Metals, Agri Commodities. Nagoya,Japan Energy, Industrial Metals, Rubber

DCE

Dalian, China

Agricultural, Plastics, Commodities Energy Precious Metals

Energy,

Agri

DME DGCX

Dubai Dubai

HKMEx

Hong Kong

Gold

IOB KANEX

Kish Island, Oil, Gas, Petrochemicals Iran Osaka,Japan Agricultural

COMEN

Nepal

Gold and Silver

[NSEL]

Mumbai, India

Spot Trading in commodities, E-Series

[NDEX]

Kathmandu, Nepal Kathmandu, Nepal Kathmandu, Nepal

Agricultural, Precious Metals, Energy

Metals,

Base

[NSX]

E-Gold, E-Silver, E-Copper, E-Iron, ECRUDE OIL, and Local Agro Products Agricultural, Energy Bullion, Base Metals,

MEX

Nepal Spot Exchange Limited Ace Derivatives & Commodity Exchange Indian Commodity Exchange Limited Multi Commodity Exchange National MultiCommodity Exchange of India Ltd National Commodity Exchange Limited Bhatinda Om & Oil Exchange Ltd. Karachi

NSE

Kathmandu, Nepal India

Agricultural, Bullion

ACE

Agricultural

ICEX

India

Energy, Precious Metals, Base Metals, Agricultural

MCX

India

Precious Metals, Metals, Agricultural Products

Energy,

NMCE

India

Precious Metals, Metals, Agricultural

NCEL

Pakistan

Precious Metals, Agriculture

BOOE

India

Agricultural

National Commodity and Derivatives Exchange Shanghai Futures Exchange Singapore SICOM Commodity Exchange Singapore SMX Mercantile Exchange

Precious Metals, Agricultural NCDEX

India

All

Shanghai, China Singapore

Industrial metals, Gold, Fuel Oil, Rubber Agricultural, Rubber

Singapore

Tokyo Commodity

TOCOM

Tokyo, Japan

Futures & Options contracts in Precious Metals such as physically delivered Gold, Base Metals, Agriculture Commodities, Energy such as WTI and Brent denominated in Euro, Currencies such as Euro-US Dollar Contract, Commodity Indices Energy, Precious Metals, Industrial Metals, Agricultural

Exchange Tokyo Grain TGE Exchange Zhengzhou CZCE Commodity Exchange Buon Ma Thuot BCEC Coffee Exchange Center

Tokyo, Japan Zhengzhou, China Buon Thuot, Vietnam

Agricultural Agricultural, PTA

Ma Coffee

Europe Exchange APX-ENDEX Commodity Bratislava, JSC Climex Abbreviation APXENDEX Exchange CEB CLIMEX Location Product Types Amsterdam, the Energy Netherlands Bratislava, Slovakia Emissions, Agricultural, Diamonds Amsterdam, the Emissions Netherlands Europe Agricultural Europe Emissions Vienna, Austria London, UK Hannover, Deutschland Leipzig, Germany Electricity, Emission Allowances Industrial Metals, Plastics Agricultural Energy, Emissions

NYSE Liffe European Climate ECX Exchange Energy Exchange Austria EXAA London Metal Exchange LME Risk Management RMX Exchange European Energy Exchange EEX

Oceania Exchange Australian Exchange Abbreviation Location Securities ASX Sydney, Australia Product Types Agricultural, Electricity, Thermal Coal & Natural Gas

Commodity Exchanges in India MCX Multi Commodity Exchange of India Limited (MCX) is an independent and demutilated exchange with a permanent recognition from Government of India. NMCEIL National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, Electronic Multi-Commodity Exchange in India.

NCDEX National Commodity & Derivatives Exchange Limited (NCDEX) is a public limited company in Mumbai and the only commodity exchange in the country promoted by national level institutions. It is managed by online multi commodity exchange.

India Bullion Market Live price charts of Gold, Silver, Indian Rupee, Gold INR oz & 100g 995, Silver Rupees and Global Bullion news, stories. & graphs.

LEADING COMMODITY MARKETS OF INDIA The government has now allowed national commodity exchanges, similar tothe BSE & NSE, to come up and let them deal in commodity derivatives in anelectronic trading environment. These exchanges are expected to offer anation-wide anonymous, order driven, screen based trading system fortrading. The Forward Markets Commission (FMC) will regulate these exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. They are: Commodity Market in India 1. Multi Commodity Exchange (MCX), Mumbai 2. National Commodities and Derivatives Exchange Ltd (NCDEX), Mumbai 3. National Board of Trade (NBOT), Indore 4. National Multi Commodity Exchange (NMCE), Ahmedabad Country Australia Chinese mainland Hong Kong India Pakistan Singapore UK USA Regulatory agency Australian Securities and Investments Commission China Securities Regulatory Commission Securities and Futures Commission Securities and Exchange Board of India and Forward Markets Commission (FMC) Securities and Exchange Commission of Pakistan Monetary Authority of Singapore Financial Services Authority Commodity Futures Trading Commission

Regulators Each exchange is normally regulated by a national governmental (or semi-governmental) regulatory agency: GUIDELINES BY THE RBI PERTAINING TO COMMODITY FUTURE TRADING The guidelines are: These guidelines cover the Indian entities that are exposed to commodity price risk. Name and address of the organization I. A brief description of the hedging strategy proposed: Description of business activity and nature of risk. Instruments proposed to be used for hedging. Exchanges and brokers through whom the risk is proposed to be hedged and credit lines proposed to be available. The name and address of the regulatory authority in the country concerned may also be given. Size/average tenure of exposure/total turnover in a year expected. II. Copy of the risk management policy approved by the Board of Directors covering: Risk identification Risk measurements Guidelines and procedures to be followed with respect to revaluation/monitoring of positions. Names and designations of the officials authorized to undertake transactions and limits. III. Any other relevant information The authorized dealers will forward the application to Reserve Bank along with copy of the Memorandum on the risk management policy placed before the Board of Directors with specific reference to hedging of commodity price exposure. . i. All standard exchanges traded futures will be permitted. ii. Tenure of exposure shall be limited to 6 months. Tenure beyond 6 months would require Reserve Banks specific approval. iii. Corporate who wish to hedge commodity price exposure shall have to ensure that there are no restrictions on import/export of the commodity hedged under the Exim policy in force.

After grant of approval by Reserve Bank, the corporate concerned should negotiate with offshore exchange broker subject, inter alia, to the following:Brokers must be clearing members of the exchanges, with good financial track record. Trading will only be in standard exchange- traded futures contract/options. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) SEBI was setup in April 12, 1988. To start with, SEBI was set up as a non-statutory body. It took 4 years for the government to bring about a separate legislation in the name of securities and exchange board of India Act, 1992, conferring statutory powers over practically all aspects of capital market operations Objectives of SEBI To protect the interest of investors so that there is a steady flow of savings into the capital market. To regulate the securities market and ensure fair practices by the issuers of securities, so that they can raise resources at minimum cost. To provide efficient services by brokers, merchant bankers and the other intermediaries, so that they become competitive and professional.

Functions of SEBI Sec 11 of the SEBI act specifies the functions as follows: \ Regulation of the stock exchange and self-regulatory organizations. Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market. Regulation and registration of the working of collective investment schemes including Mutual funds. Prohibition of fraudulent and unfair trade practices relating to security market. Prohibit insider trading in securities. Regulation substantial acquisitions of shares and takeover of companies.

SEBI guidelines for COMMODITY FUTURES TRADING There are many regulatory authorities, which are monitoring commodity futures trading, one of them is SEBI. The following Report is one of the regulatory frameworks for the commodity futures trading.

Report of the committee appointed by the SEBI on participation by Securities Brokers in Commodity Futures Markets under the chairmanship of Shri K.R. Ramamurthy (February 5, 2003) The following were the recommendations:Participation of Securities Brokers in Commodity Futures Market The committee was of the unanimous view that participation of intermediaries like securities brokers in the commodity futures market is welcome as it could inter-alia increase the number of quality players, infuse healthy competition, boost trading volumes in commodities and in turn provide impetus to the overall growth of the commodity market. \Since the commodity market falls under the regulatory purview of a separate regulatory authority viz., Forward Market Commission, to ensure effective regulatory oversight by the Forward Market Commission, and to avoid any possible regulatory overlap, the pre-condition for such entry by intending participating securities brokers in the commodity futures market would be through a separate legal entity, either subsidiary or otherwise. Such entity should conform from time to time to the regulatory prescription of Forward Market Commission, with reference to capital adequacy, net worth, membership fee, margins, etc. The committee took note of the fact that the existing provisions of the Securities Contracts (Regulation) Rules, 1957 forbid a person to be elected as a member of a recognized stock exchange if he is engaged as principal or employee in any business other than that of securities, except as a broker or agent not involving any personal financial liability. The Committee recommended that the above provisions in the Securities Contract (Regulations) Rules be removed/amended suitably to facilitate securities brokers participation/engagement in commodity futures. An important felt need was the necessity to improve market awareness of trading and contracts in commodities. The committee therefore recommended the forward market commission take appropriate initiatives in training the market participants.

II) Risk containment measures

In the background of the Forward Market Commissions report on risk containment measures currently obtaining in commodity markets and the committees recommendation to permit security brokers participation in commodities markets only through a separate legal entity, the committee considers that ensuring strict compliance of the regulatory prescriptions like net worth, capital adequacy, margins, exposure norms, etc., by the respective market regulators, and

due oversight would be an adequate safeguard to ensure that the risks are not transmitted from one market to the other.

III) Utilization of existing infrastructure of stock exchanges On the issue of convergence/integration of the securities market and commodities market, that is, of allowing stock exchanges to trade in commodity derivatives and vice versa, the committee was of the view that in the current statutory and regulatory framework and existence of two separate and established regulators, the issue of integration of the two markets would require detailed examination, particularly for the purpose of defining clearly the scope of regulatory purview and responsibility. Also, given the concerns raised by a section of members that such integration may lead to further fragmentation of volumes and liquidity in the nascent commodity markets, the committee was of the view that the issue of markets could be taken up for consideration at a future date as the two markets mature further.

Regulatory framework in India In India, the statutory, basis for regulating commodity futures trading is found in the Forward Contracts (Regulation) Act, 1952, which (apart from being an enabling enactment, laying down certain fundamental ground rules) created the permanent regulatory body known as the mForwards Markets Commission. This commission holds overall charge of the regulation of all forward contracts and carries out its functions through recognized association. Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by Forwards Market Commission (FMC); Forwards Market Commission is under the purview of the Ministry of Food, Agriculture and Public Distribution.

Increasing or "inflating" the money supply helps create what we often refer to as inflation or rising prices. We experience "good inflation" when the price of our stocks or home increases. We experience "bad inflation" when oil hits $80 per barrel. Rising asset values (homes, stocks, etc.) are a form of inflation, but no one gets upset when they feel wealthier after looking at their 401(k) statement or home equity report. Asset inflation feels good, but is it just an illusion of increased wealth driven largely by an ever increasing money supply? When President Nixon closed the gold window in 1971, the U.S. dollar went off the gold standard. The dollar in your wallet cannot be exchanged for gold. The dollar is simply backed by the "full faith and credit" of the U.S. government. Today, no major currency is on the gold standard. As a result, gold acts as the world's only true currency. We can create an endless supply of new paper money using the fractional reserve banking system in the United States. We cannot endlessly increase the supply of gold (especially in the short run). As a result, gold represents a better place to store wealth than any paper or fiat currency. In the financial press, the appeal of gold is often portrayed as a way to protect yourself from "end-of-the-world" events. The press tells us that people buy gold because they are fearful. There is no question that there is some truth to that concept. However, I would argue that the real appeal of gold is that it enables you to protect yourself from constant money creation which erodes the purchasing power of paper currencies. As the chart below shows, the U.S. dollar, as measured vs. a basket of foriegn currencies via the U.S. Dollar Index (shown in red below), has lost roughly 30% of its purchasing power since July of 2001. The endless creation of credit and the dollar's decline has not gone unnoticed by many investors. These investors have flocked to gold (shown in blue)

The recent downtrend in precious metals has been independent of price activity in the US dollar index. This action is an example of how the traditional inflationary fundamentals do not apply to current financial markets and economies. In the past, the consensus has been that the US dollar has performed to the inverse of many commodities, gold being weighted the heaviest of them all against the dollar. However not only is that assumption not true in all cases throughout history, but even if it were hypothetically true, we are still watching these supposed long term trends decouple under the influence of long overdue secular changes and recent economic and monetary policies set by those in charge. There is no reason think that gold is going to underperform based on strength in the dollar, or outperform based on weakness in the dollar. To specify on those particular trends, gold has plenty of catching up to do. This catch up game is independent of the dollar index for it was gold that was in a bear market for 20 years, even as the dollar had devalued rapidly during that time. If you used gold to gauge inflation during that time period, your measurements would have been very much off. I say that the gold-dollar correlation isn't reliable because the market has shown me that it has not been by at times not correctly pricing the two relative to economic conditions, and because the dollar's fundamentals are now more than ever based primarily on the strength of other currencies. I believe that the dollar index will be in a bull market before it ever collapses.

This chart shows that while there has been an inverse gold/dollar correlation between 1986-1990

and roughly 1996-2005, there was also a period from 1990-1996 where the correlation was weak and at times non-existent. In addition, gold hasn't always been an accurate measure of inflation as some have argued. Gold stayed in a trading range of about $300-$450 for 20 years. If it was a measure of inflation, then needless to say it was off by a wide margin. For the record, I do believe that gold can at times be a measure, a hedge, and a symptom of inflation, but attempting to draw conclusions on inflation using gold and the dollar can end with misleading results.

The correlation breaks down again in the beginning of 2009 as the dollar has been volatile while gold has been steady and ascending. In my opinion the main reason behind this has been the extremely loose monetary policy from the US central bank which up until recently, had investors (rightfully) believing that inflation would set in domestically. However that hasn't been the case and it's been the US that has sent the inflation to other countries who have been attempting to peg their currency to ours. If that knowledge had been foreseen by the market, then I believe that

the dollar would not have sold off so hard after QE 1 and in the latter part of 2010 and instead would have outperformed other currencies. Most who have predicted a dollar collapse have suggested that the fiscal problems of the United States are greater than other countries because we are a debtor nation. I do understand the magnitude of our ballooning national debt and sluggish GDP which is being held up only by the Fed's policies, however despite China and India's resource demand and Brazil's oil, the United States is still in better fiscal shape than nations abroad. Today gold snapped that upper trend line that had been holding us down since the beginning of the year. We like that the open and closing prices for today made for a long candlestick which signals a decisive break of resistance. The bullish crossover in the NCDEX shows that long positions are gaining momentum which further solidifies the breakout. The bottom line here is to not use the dollar index as a main component of gold/commodities analysis. If you do use it, be sure to fully research the fundamentals in each market as both assets are used universally across the globe and have more demand and liquidity than any other asset. Both gold and the dollar are going to see strength in the future though gold will most surely outperform the dollar. We don't think gold will have trouble getting to $2000 by the end of this year but the dollar's fate will be much more reliant on foreign insolvency and how long other emerging markets will be able to sustain themselves with 5-20% domestic inflation rates.

Yellow Gold vs. Crude Black Gold

Oil producers normally find it in their best interest to add steadily to productive capacity. Gradual addition of capacity year after year keeps oil supply in rough equilibrium with demand as the global economy grows. Mild shortages and surpluses sometimes arise, but they are quickly addressed by market forces so long as monetary policy is anchored properly. It was really a monetary error that began throwing the oil market out of whack three years ago, one we wrote about at the time in forecasting a sharp decline in the price of oil. Specifically, it was the sharp deflation of the U.S. dollar which began in 1997-98. As the value of the dollar rose into deflationary territory -- as measured against gold, the best proxy for commodities, many countries were forced to break their dollar links and devalue their currencies. This triggered major global disruption, first in Asia and then in Latin America. As global economy slowed, oil demand plunged, leaving an excess of oil on the market, which caused oil to fall harder and faster than gold or the currencies tracing the dollar. As the oil price fell to $10/bbl in 1998/99, oil producers at the margin were driven out of business. Those that remained stopped investing in infrastructure and production. Once the world economy adjusted to the deflation, in 1999, global growth resumed. Governments in Asia and Latin American began to find the keys to growth, stabilizing their currencies and jettisoning some of the austere

fiscal policies pressed upon them by the IMF and World Bank. The rebound in commerce quickly increased the need for oil. Demand began to exceed available inventories, pushing prices up and out of their traditional trading locus. Had oil producers at the margin not been totally destroyed by the 1997-98 commodity depression, no supply shortages would have emerged. The oil price should come back down as high prices pull capital towards higher relative returns, which implies more production -- but the process will take a while. The 1997/98 oil price plunge had a searing effect on producers, who obviously do not want to be burned again, should another deflation be right around the corner. Oil producers may not have identified price swings as monetary deflation, but they certainly grasped the concept that committing to new fixed capacity is more risky in an environment where the nominal price is highly volatile. As long as the dollar is not fixed in terms of gold, its volatility will continue to throw off misleading signals of capital shortages and surpluses, inevitably leading to booms and busts.

While gold was extremely popular the past few years, I think its safe to say crude oil is unbeatable for popularity, as its a resource which almost everyone uses on a daily basis and it affects all of us in the wallet when oil prices rise as fuel, shipping costs and petroleum products start to cost more and more. This is the first time I have REALLY noticed everyone is following the price of oil. When kids start talking about it, then you know it's being watched like a hawk from all types of individuals and traders. Gold and oil traditionally have had a 15-to-1 relationship, only slipping out of congruence for short periods of time. When the gold/dollar relationship is anchored, the oil/dollar relationship remains stable as well. When crude oil peaked at $147.90 back in July, people were starting to panic. The increase on fuel alone was really taking a toll on commuters and shipping costs went through the roof, which hurt almost every business in some way. That being said, oil is now back down at support and looking ready for a bounce. Oil continues to be in a strong down trend and waiting for a low risk entry point is crucial. Picking bottoms or chasing rallies just doesnt perform well over the long run. Following a basket of ETFs like USO, DXO, DTO, XLE, GLD, DGP, GDX, XGD.TO and more, allows me to catch moves within the gold and oil sector. My strategy is conservative and I do miss a number of good trades, because I need risk to be under 3% before I jump. Generally within the basket of ETFs I follow, I will get one or two signals when the market reverses or bounces off support. And that is the fund where I put my money. I prefer to trade GLD and USO, but if GDX gives a signal I trade it when the time is right. Quality trades are what I focus on finding/waiting for and I avoid a ton of high risk losing trades, which are the silent killers. One high-risk trade losing 7%+ will cripple your profits for

the year quickly. I continue to wait for an entry point, which could be just around the corner if things work out. Gold has performed well after finding support and bouncing to the top of its descending trend line. The daily gold chart is full of noise and with everyone excited for the next big rally in gold, I am sure Friday's big up day really has you stressed out in case this is the next gold bull, because you dont want to get left behind. During emotional times like this, I like to step back and take a look at gold from a distance. The daily chart, which I use for trading gold, can sometimes raise my blood pressure, because of the noise (price swings) on the chart. As you can see in the chart below, it looks like gold is ready to continue its run higher. But what we forget to keep in mind is that the weekly chart is bearish giving gold downward pressure.

Crude Oil Vs. Dollars

Oil is priced in dollars on the world market. By definition, when the dollar is weaker, foreign currencies are stronger. This means that people in other countries can buy more oil for the same amount of money. When oil becomes cheaper to foreigners, theyre able to buy more and as people in other countries buy more, overall demand for oil rises. This of course drives up the price in dollars, which, again, is how the price of oil is denominated on world markets. Consequently, while oil prices in the US look like theyre going up sharply in dollars, in effect, it may actually be going up by much less or staying about the same in other countries. Spot Prices Versus Future Prices Spot Price refers to the price paid for oil now -as in the amount of money you would hand over to a cashier at Chevron store for their tossing a barrel of oil into your truck. Future Price refers to the price paid for oil contracts promising the delivery of oil at a future date.

Given figure is a ten year dollar-oil correlation chart where this correlation swings back and forth to positive and negative territory. From 1995 to 1997 a strong positive dollar-oil correlation, a move where both dollar and oil index move same direction in tandem, is in effect. Next two years from 1997 to 1999 marks strong negative correlation, a move where both dollar and oil index move in opposite direction. Again from 1999 to 2001 these pairs exhibit strong positive correlation as both of them make move to north in tandem. Around 2001 this strong positive dollar-oil correlation breaks down to a strong negative correlation.

Figure: WTI Crude Oil Vs. USD This Figure is the most recent year correlation graph. As pronounced in the graph, the strong negative correlation between these pairs is well worked out all throughout the years 2007, 2008 and 2009. Now you might be saying -so we see this 2 year positive correlation followed by 2 year negative correlation then followed by current state of negative correlation between dollar and oil? What significant conclusions can we draw from these dollar-oil correlation graphs that we can implement in our trading practices? Oil is one of the most global viable commodity pegged to the U.S. dollar -the US dollar is the currency of choice in global crude oil trade. As with any other commodities pegged in terms of the U.S. dollar, oil price tend to climb higher with weaker dollar. Weaker dollar makes oil cheaper from non-U.S. buyer's perspective. So from investors perspective, it will be wise to buy a viable commodity like oil when it's cheaper. This could have a net effect of driving high demand causing price inflation for oil. So high gasoline price translates to a weaker dollar and vice versa.

We, by applying deeper analysis to extract meaningful conclusion whether dollar-oil correlation is simply a fluke or simply an outcome of the broader economic effects coupled with a stronger or weaker U.S. dollar? Let's analyze strong negative dollar-oil correlation first. Dollar gets devalued when the U.S. economy is weak. As the economy weakens, the Fed cuts interest rate. The Fed funds rate before September 2007 was at 5.25%. Since the beginning of credit crunch crisis of 2007, the Fed cut rate several times to the current rate which stands at 0-.25% as of December 2009. Lower interest rate translates to lower rate of return so the investment dollar leaves an ailing U.S. economy as fleas leave a dead body for better return abroad. Lower dollar translates to cheaper oil for non-U.S. buyers. Say oil is $100 per barrel and 70 Euros buy $100. Then 70 Euros buy a barrel of oil as it is pegged to dollar. When dollar gets devalued currency like Euros appreciate. For EUR/USD pair say Euros appreciate by 10 percent. Then it means now you can buy same $100 with only 63 Euros. In other words, now it will cost only 63 Euros to buy a barrel of oil. Will this drive high demands for oil -Yes or No? The best answer is maybe or maybe not. The dollar devaluation implies we can buy less oil with the same dollar at local market.

Terms and Definitions related to Commodity Market: Accruals:- Commodities on hand ready for shipment, storage and manufacture

Arbitragers: - Arbitragers are interested in making purchase and sale in different markets at the same time to profit from price discrepancy between the two markets.

At the Market: - An order to buy or sell at the best price possible at the time an order reaches the trading pit.

Basis: - Basis is the difference between the cash price of an asset and futures price of the underlying asset. Basis can be negative or positive depending on the prices prevailing in the cash and futures.

Basis grade: - Specific grade or grades named in the exchanges future contract. The other grades deliverable are subject to price of underlying futures

Bear: - A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor of exchange to buy a definite number of futures contracts at a specific price.

Breaking: - A quick decline in price.

Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at the price within the closing range.

Buy on opening: - To buy at the beginning of trading session at a price within the opening range.

Call: - An option that gives the buyer the right to a long position in the underlying futures at a specific price, the call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call.

Cash commodity: - The actual physical product on which a futures contract is based. This product can include agricultural commodities, financial instruments and the cash equivalent of index futures.

Close: - The period at the end of trading session officially designated by exchange during which all transactions are considered made at the close.

Closing price: - The price (or price range) recorded during the period designated by the exchange as the official close.

Commission house: - A concern that buys and sells actual commodities or futures contract for the accounts of customers.

Consumption Commodity: - Consumption commodities are held mainly for consumption purpose. E.g. Oil, steel

Cover: - The cancellation of the short position in any futures contract buys the purchase of an equal quantity of the same futures contract.

Cross hedge: - When a cash commodity is hedged by using futures contract of other commodity.

Day orders: - Orders at a limited price which are understood to be good for the day unless expressly designated as an open order or good till canceled order.

Delivery: - The tender and receipt of actual commodity, or in case of agriculture commodities, warehouse receipts covering such commodity, in settlement of futures contract. Some contracts settle in cash (cash delivery). In which case open positions are marked to market on last day of contract based on cash market close.

Delivery month: - Specified month within which delivery may be made under the terms of futures contract.

Delivery notice: - A notice for a clearing members intention to deliver a stated quantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from an underlying asset. (Underlying assets can be equity, commodity, foreign exchange, interest rates, real estate or any other asset.) Four types of derivatives are trades forward, futures, options and swaps. Derivatives can be traded either in an exchange or over the counter.

Differentials: - The premium paid for grades batter than the basis grade and the discounts allowed for the grades. These differentials are fixed by the contract terms on most exchanges.

Exchange: - Central market place for buyers and sellers. Standardized contracts ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by members who are acting on behalf of their clients, companies or themselves.

Forward contract: - It is an agreement between two parties to buy or sell an asset at a future date for price agreed upon while signing agreement. Forward contract is not traded on an exchange. This is oldest form of derivative contract. It is traded in OTC Market. Not on an

exchange. Size of forward contract is customized as per the terms of agreement between buyer and seller. The contract price of forward contract is not transparent, as it is not publicly disclosed. Here valuation of open position is not calculated on a daily basis and there is no requirement of MTM. Liquidity is the measure of frequency of trades that occur in a particular commodity forward contract is less liquid due to its customized nature. In forward contracts, counter- party risk is high due to customized & bilateral nature of the transaction. Forward contract is not regulated by any exchange. Forward contract is generally settled by physical delivery. In this case delivery is carried out at delivery center specified in the customized bilateral agreement.

Futures Contract:- It is an agreement between two parties to buy or sell a specified and standardized quantity and quality of an asset at certain time in the future at price agreed upon at the time of entering in to contract on the futures exchange. It is entered on centralized trading platform of exchange. It is standardized in terms of quantity as specified by exchange. Contract price of futures contract is transparent as it is available on centralized trading screen of the exchange. Here valuation of Mark-to-Mark position is calculated as per the official closing price on daily basis and MTM margin requirement exists. Futures contract is more liquid as it is traded on the exchange. In futures contracts the clearing-house becomes the counter party to each transaction, which is called novation. Therefore, counter party risk is almost eliminated. A regulatory authority and the exchange regulate futures contract. Futures contract is generally cash settled but option of physical settlement is available. Delivery tendered in case of futures contract should be of standard quantity and quality as specified by the exchange.

Futures commission merchant: - A broker who is permitted to accept the orders to buy and sale futures contracts for the consumers.

Futures Funds: - Usually limited partnerships for investors who prefer to participate in the futures market by buying shares in a fund managed by professional traders or commodity trading advisors.

Futures Market:-It facilitates buying and selling of standardized contractual agreements (for future delivery) of underlying asset as the specific commodity and not the physical commodity itself. The formulation of futures contract is very specific regarding the quality of the commodity, the quantity to be delivered and date for delivery. However it does not involve immediate transfer of ownership of commodity, unless resulting in delivery. Thus, in futures

markets, commodities can be bought or sold irrespective of whether one has possession of the underlying commodity or not. The futures market trade in futures contracts primarily for the purpose of risk management that is hedging on commodity stocks or forward buyers and sellers. Most of these contracts are squared off before maturity and rarely end in deliveries.

Hedging: - Means taking a position in futures market that is opposite to position in the physical market with the objective of reducing or limiting risk associated with price.

In the money: - In call options when strike price is below the price of underlying futures. In put options, when the strike price is above the underlying futures. In-the-money options are the most expensive options because the premium includes intrinsic value.

Index Futures: - Futures contracts based on indexes such as the S & P 500 or Value Line Index. These are the cash settlement contracts.

Investment Commodities: - An investment commodity is generally held for investment purpose. e.g. Gold, Silver

Limit: - The maximum daily price change above or below the price close in a specific futures market. Trading limits may be changed during periods of unusually high market activity.

Limit order: - An order given to a broker by a customer who has some restrictions upon its execution, such as price or time.

Liquidation: - A transaction made in reducing or closing out a long or short position, but more often used by the trade to mean a reduction or closing out of long position.

Local: - Independent trader who trades his/her own money on the floor of the exchanges. Some local act as a brokers as well, but are subject to certain rules that protect customer orders.

Long: - (1) The buying side of an open futures contract or futures option; (2) a trader whose net position in the futures or options market shows an excess of open purchases over open sales.

Margin: - Cash or equivalent posted as guarantee of fulfillment of a futures contract (not a down payment).

Margin call: - Demand for additional funds or equivalent because of adverse price movement or some other contingency.

Market to Market: - The practice of crediting or debating a traders account based on daily closing prices of the futures contracts he is long or short.

Market order: - An order for immediate execution at the best available price.

Nearby: - The futures contract closest to expiration.

Net position: - The difference between the open contracts long and the open contracts short held in any commodity by any individual or group.

Offer: - An offer indicates willingness to sell at a given price (opposite of bid).

On opening: - A term used to specify execution of an order during the opening.

Open contracts: - Contracts which have been brought or sold without the transaction having been completed by subsequent sale, repurchase or actual delivery or receipt of commodity.

Open interest: - The number of open contracts. It refers to unliquidated purchases or sales and never to their combined total.

Option: - It gives right but not the obligation to the option owner, to buy an underlying asset at specific price at specific time in the future.

Out-of-the money: - Option calls with the strike prices above the price of the underlying futures, and puts with strike prices below the price of the underlying futures.

Over the counter: - It is alternative trading platform, linked to network of dealers who do not physically meet but instead communicates through a network of phones & computers.

Pit: - An octagonal platform on the trading floor of an exchange, consisting of steps upon which traders and brokers stand while trading (if circular called ring).

Point: - The minimum unit in which changes in futures prices may be expressed (minimum price fluctuation may be in multiples of points).

Position: - An interest in the market in the form of open commodities.

Premium: - The amount by which a given futures contracts price or commoditys quality exceeds that of another contract or commodity (opposite of discount). In options, the price of a call or put, which the buyer initially pays to the option writer (seller).

Price limit: - The maximum fluctuation in price of futures contract permitted during one trading session, as fixed by the rules of a contract market.

Purchase and sales statement: - A statement sent by FMC to a customer when his futures option has been reduced or closed out (also called P and S)

Put: - In options the buyer of a put has the right to continue a short position in an underlying futures contract at the strike price until the option expires; the seller (writer) of the put obligates himself to take a long position in the futures at the strike price if the buyer exercises his put.

Range: - The difference between high and low price of the futures contract during a given period.

Ratio hedging: - Hedging a cash position with futures on a less or more than one-for-one basis.

Reaction: - The downward tendency of a commodity after an advance.

Round turn: - The execution of the same customer of a purchase transaction and a sales transaction which offset each other.

Round turn commission: - The cost to the customer for executing a futures contract which is charged only when the position is liquidated.

Scalping: - For floor traders, the practice of trading in and out of contracts through out the trading day in a hopes for making a series of small profits.

Settlement price: - The official daily closing price of futures contract, set by the exchange for the purpose of setting margins accounts.

Short: - (1) The selling of an option futures contract. (2) A trader whose net position in the futures market shows an excess of open sales over open purchases.

Speculator: - Speculator is an additional buyer of the commodities whenever it seems that market prices are lower than they should be.

Spot Markets:-Here commodities are physically brought or sold on a negotiated basis.

Spot price: - The price at which the spot or cash commodity is selling on the cash or spot market.

Spread: - Spread is the difference in prices of two futures contracts.

Striking price: - In options, the price at which a futures position will be established if the buyer exercises (also called strike or exercise price).

Swap: - It is an agreement between two parties to exchange different streams of cash flows in future according to predetermined terms.

Technical analysis (charting): - In price forecasting, the use of charts and other devices to analyze price-change patters and changes in volume and open interest to predict future market trends (opposite of fundamental analysis).

Time value: - In options the value of premium is based on the amount of time left before the contract expires and the volatility of the underlying futures contract. Time value represents the portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the options draws near and/or if the underlying futures become less volatile.

Volume of trading (or sales): - A simple addition of successive futures transactions (a transaction consists of a purchase and matching sale).

Writer: - A sealer of an option who collects the premium payment from the buyer.

Summary

This decade is termed as Decade of Commodities. Prices of all commodities are heading northwards due to rapid increase in demand for commodities. Developing countries like China are voraciously consuming the commodities. Thats why globally commodity market is bigger than the stock market. India is one of the top producers of large number of commodities and also has a long history of trading in commodities and related derivatives. The Commodities Derivatives market has seen ups and downs, but seems to have finally arrived now. The market has made enormous progress in terms of Technology, transparency and trading activity. Interestingly, this has happened only after the Government protection was removed from a number of Commodities, and market force was allowed to play their role. This should act as a major lesson for policy makers in developing countries, that pricing and price risk management should be left to the market forces rather than trying to achieve these through administered price mechanisms. The management of price risk is going to assume even greater importance in future with the promotion of free trade and removal of trade barriers in the world. As majority of Indian investors are not aware of organized commodity market; their perception about is of risky to very risky investment. Many of them have wrong impression about commodity market in their minds. It makes them specious towards commodity market. Concerned authorities have to take initiative to make commodity trading process easy and simple. Along with Government efforts NGOs should come forward to educate the people about commodity markets and to encourage them to invest in to it. There is no doubt that in near future commodity market will become Hot spot for Indian farmers rather than spot market. And producers, traders as well as consumers will be benefited from it. But for this to happen one has to take initiative to standardize and popularize the Commodity Market. BIBLIOGRAPHY BOOKS AND MAGAZINES Trading Commodities and Financial Futures: A Step by Step guide to Mastering the Market, 3 rd Edition by George Kleinman MCX Certified Commodity Professional Reference Material Options, Futures and Other Derivatives by Johan C. Hull Commodities Trading report Garner, Carley. "A Trader's First Book on Commodities". (New Jersey: FT Press, 2010): pg 19.

WEBSITES http://commodities.in http://finance.indiamart.com/markets/commodity/ http://www.commoditiescontrol.com http://www.mcxindia.com http://www.ncdex.com http://investmentz.co.in http://trade.indiainfoline.com http://www.finance.indiamart.com Notes http://beginnersinvest.about.com/cs/commodities/f/whatcommodities.htm O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 152. ISBN 0-13-063085-3. Gorton GB et al. (2008). The Fundamentals of Commodity Futures Returns. Yale ICF Working Paper No. 07-08 http://www.cmegroup.com/wrappedpages/web_monthly_report/Web_Volume_Report_CMEG.p df CRU International Limited. Private Reports. 2005, 2006. Energy Information Administration, U.S. Department of Energy. International Energy Outlook 2006. Food and Agriculture Organization of the United Nations. FAOSTAT. <http://faostat.fao.org/> Gould, Brian W and Hector J. Villarreal. An assessment of the current structure of food demand in urban China. Agricultural Economics, Vol. 34, p 1-16, 2006. International Energy Agency. World Energy Outlook 2005. International Energy Agency. Energy Balances of OECD Countries. 2005. International Energy Agency. Energy Balances of Non-OECD Countries. 2005. International Energy Agency. Oil Market Report. Various Issues. International Iron and Steel Institute. World Crude Steel Production. Various Issues. Peak Oil. <http://www.peakoil.net/> PricewaterhouseCoopers, John Hawksworth, The World in 2050. March 2006. World Bank. Commodity Markets Review. Various Issues. World Bank. Global Development Finance 2006. World Bank. Global Development Prospects 2006.

World Bureau of Metals Statistics. World Metals Statistics. Various Issues.