Forget stocks, went a refrain popular with investors in India and elsewhere over the past 12 months-the act of forgetting, especially in India, was made all the more difficult by a stock market that was visibly on steroids-and look at commodities. Several sage investors followed that advice, and to good effect. With every brokerage worth its commission launching commodity broking services (there are some 120 commodities available for futures trading on three national and 22 regional commodity exchanges in India), the commodity market will likely soon witness the lemming effect that is more commonly seen on the stock market. Indeed, over the past year, the calls given by several commodity brokerages resulted in huge dividends for investors.
That was then (which, depending on the commodity in question can be as recent as May or June, this year). A quick recap: gold prices climbed up sharply from a five-year low of $255.95 (Rs 12,030 then) an ounce (28.34 gm) in April 2001 to a high of $725 (Rs 34,075 then) an ounce in May 2006; oil, from $23-24 a barrel (159 litres) to a high of $78.40 a barrel in July 2006. The yellow metal was predicted to touch $800 an ounce by end-2006; oil, $100. Since then, the prices of both commodities have headed south. Ajoy Pathak, Associate Vice President, Kotak Commodity Services, predicts that gold prices could now decline to $500 an ounce, maybe even $475, although he remains "bullish" on the commodity "in the longer run". And Pankil Shah, Associate Director, Angel Commodities, believes that there is no fundamental reason for crude prices to increase now. "The actual valuation of crude is $50-55 a barrel," he says. Today, gold trades at $585-590 an ounce and crude at around $60 a barrel.There is still money to be made in both commodities, just as there is money to be made in the commodity market in general. Only, things aren't as easy as they once were. There is no clear trend that indicates either an upturn or a downturn. Savvy investors say that the only way to make money now from commodities, is the only way to ever make money from commodities, play every emerging trend both ways. There are other nuances to investing in commodities as well, some similar to the tenets of prudent stock market investing-"Commodities have their own demand-supply factors and you need to study all the information before plunging in," says P. Patnaik, Associate Vice President, Kotak Commodity Services-and others different. "You have to pick the right exchange and the right commodity for safe investing (in commodities)," says a commodity analyst. That said, here are a few simple strategies to getting the most out of your investment in commodities.
Seven Strategies
1. Buy gold: Yes, this is, despite the bearish outlook on gold in the short-term, the safest commodity investment even today. Investors can buy gold from commodity exchanges the same way they buy it from neighbourhood jewellers or banks. "This is the safest and by far easiest way to enter the commodity market," says Kotak's Patnaik. "You are not only assured of the best quality, but also have the facility to keep the gold in demat (electronic) form." Indeed, the opinion among commodity brokers is that it is difficult to go wrong with gold. "Gold is inflation hedged," says Sumesh Parasrampuria, Head (Commodities), Motilal Oswal Commodities Brokers. "You will surely end up with decent returns."
2. Go vanilla: The world of commodities and commodities trading may appear strange to the newbie investor. Such investors would do well to adopt the plain vanilla trading strategy, simply because it is easiest to understand (although pulling it off requires hard work and a bit of luck). This simply involves taking a directional call on the market, bullish or bearish, as in "I expect prices of gold to increase" or "I expect prices of copper to decline". Investors who seek to adopt this strategy should observe price trends, and those of most commodities tend to move in cycles. "You have to get your cycle right before you start investing in commodities," says Motilal Oswal's Parasrampuria.
3. Follow the leader: There is another easy way to make money in commodities. "Ride the trend," says Kotak's Pathak. So, in a futures market, all investors will need to do is follow the trend, irrespective of whether it is bullish or bearish.
4. Set a stop-loss: "Keep a stop-loss if the actual market is going against your initial call," says Angel Commodities' Shah. A stop-loss is a predetermined amount of loss an investor is willing to incur, and at which, he or she exits the commodity. The underlying logic: there is no point in hanging on to a commodity if the price is going against your initial call. "You are only bound to lose money if you try to average it out," adds Shah.
5. Seek an expert: Don't try to invest in commodities on your own; seek and retain the services of a professional brokerage. "Unlike equity, commodities require in-depth knowledge of international price movements, demand and supply positions, and other economic variables," explains Shah. Remember, despite all their research, analysts, even international ones, didn't see the sudden drop in gold and oil prices coming.6. Play spreads: The difference in price between one futures contract and another is called a spread. Investors can play spreads to their advantage. For instance, to leverage a bull spread they would have to simply simultaneously buy and sell futures contracts in the same commodity (or related ones) with the aim of benefiting from a rise in prices while limiting losses if the call happens to be wrong (usually achieved by buying the futures contract with a shorter or closer delivery and selling the one with a longer one). Leveraging a bear spread, similarly, involves an attempt to benefit from a decline in prices while limiting losses should prices rise (usually achieved by selling the futures contract with a shorter or closer delivery and buying the one with a longer one).
7. Go systematic: Systematic investment plans (sips) have become very popular with mutual fund investors. A similar strategy could pay off in the commodity market too. Essentially, investors keep buying a commodity every month, month after month. "After a certain period, one can take the physical delivery and pledge it with the exchange," says Kotak's Patnaik. This product is the safest and holds the potential of the highest return. Better still, investors do not need to track the market on a daily basis.