Category Archives: Commodities

How $50 Oil Changes Almost Everything

Isaac Arnsdorf & Simon Kennedy, Economic Times 8/1/15


From geopolitics to inflation, the biggest slide in energy prices since 2008 recession is shaking up things in every conceivable sphere

The plummeting price of oil means no more trout ice cream. Coromoto, a parlour in Merida, Venezuela, famous for its 900 flavours, closed during its busiest season in November because of a milk shortage caused by the country’s 64% inflation rate, the world’s fastest.

That’s the plight of an oil-producing nation. At the same time, consuming countries like the US are taking advantage. Trucks, which burn more gasoline, outsold cars in December by the most since 2005, according to data from Ward’s Automotive Group.

The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialised consumers, which could make the world safer, according to a Berenberg Bank report.Surging US shale supply , weakening Asian and European demand and a stronger dollar are pushing oil past threshold after threshold to a five-and-half-year low, with a dip below $40 a barrel “not out of the question“, said Rob Haworth, a Seattle based senior investment strategist at US Bank Wealth Management, which oversees about $120 billion.

“Oil prices are the big story for 2015,“ said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.“

Weak Prices

Brent crude, the international benchmark, fell as low as $49.66 a barrel on Wednesday , dropping below $50 for first time since 2009. Prices dropped 48% in 2014 after three years of the highest average prices in history . West Texas Intermediate, the US benchmark, plunged to as low as $46.83 on Wednesday , about a 56% decline from its June high.

“We see prices remaining weak for the whole of the first half “ of 2015, said Gareth Lewis-Davies, an analyst at BNP Paribas in London.

If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for UnitedICAP in Jersey City, New Jersey, who projected the 2014 drop.

“Where prices bottom will be based on an emotional decision,“ Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.“

The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6% on average over the next two years if oil fell to $40, while Russia would contract 2.5% over the same period, according to an Oxford Economics Ltd’s December analysis of 45 national economies.

Inflation Outlook

Among advanced economies, Hong Kong is the biggest winner, while Saudi Arabia, Russia and the United Arab Emirates fare the worst, according to Oxford Economics.

One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York.

Kasman and his team are already predicting global inflation to reach 1.5% in the first half of this year, while sustained weakness in oil suggest a decline to 1%, they said.

Negative Inflation

The euro area would probably witness negative inflation, while rates in the US, the UK and Japan also would weaken to about 0.5%. For what it calls price stability, Fed’s inflation target is 2%. Emerging-market inflation would also fade although lower currencies and policies aimed at slowing the effects on retail prices may limit the fall.

As for growth, a long-lasting price of $60 would add 0.5 percentage point to global gross domestic product, they estimate.

Even as cheaper fuel stimulates the global economy, it could aggravate political tension by squeezing government revenue and social benefits, Citigroup Inc analysts said in a January 5 report.

Either way , previously unthinkable events now look more likely .Byron Wien, a Blackstone Group vice-chairman, predicting that Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear programme.

Iran Losses

Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad.

President Hassan Rouhani, elected on a pledge of prosperity to be achieved by ending Iran’s global isolation, is facing a falling stock market and weakening currency .Iranian officials are warning of spending and investment cuts in next year’s budget, which will be based on $72-a-barrel crude. Even that forecast is proving too optimistic. “Iran will stumble along with less growth and development,“ said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech in Blacksburg, Virginia, who specialises in Iran’s economy . “The oil price fall is not reason enough for Iran to compromise.“

The Russian economy may shrink 4.7% this year if oil averages $60 a barrel under a “stress scenario,“ the central bank said in December. The plunge in crude prices prompted a selloff in the ruble with the Russian currency falling to a record low against the dollar last month and tumbling 46% last year, its worst performance since 1998, when Russia defaulted on local debt.

Russian Production

“The risk is that, as a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook,“ said Holger Schmieding, Berenberg Bank’s London-based chief economist.However, “the massive blow to Russia’s economic capabilities should -over time -make it less likely that Russia will wage another war.“

Russian oil production rose to a post-Soviet record last month, showing how pumping of the nation’s biggest source of revenue has so far been unaffected by US and European sanctions or a price collapse. The nation increased output to 10.667 million barrels a day, according to preliminary data from the Energy Ministry on January 2.That compares with global consumption of 93.3 million barrels a day , based on the International Energy Agency’s estimate for 2015.

Venezuela, which relies on oil for 95% of its export revenue, risks insolvency, Jefferies LLC said in a January 6 note. The cost of insuring the country’s five year debt has tripled since July, Citigroup said. President Nicolas Maduro is visiting China to discuss financing and expects to travel to other OPEC nations to work out a pricing strategy.

Confounding Investors

The US, still a net oil importer, would accelerate economic growth to 3.8% in the next two years with oil at $40 a barrel, compared with 3% at $84, the Oxford Economics study found. The boost to consumers could be offset by oil companies’ scaling back investments, according to Kate Moore, chief investment strategist at JPMorgan Private Bank. Producers are cutting spending by 20% to 40%, according to Fadel Gheit, an analyst at Oppenheimer & Co.

The mixed picture is confounding investors. The Standard & Poor’s 500 Index of US equities fell 1.9% on January 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing.

While cheaper oil helps consumers, business spending has a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in the S&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp.

Bets on high energy prices have mashed share prices of companies such as Ford Motor Co, Tesla Motors Inc and Boeing Co. ­ Bloomberg.



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E-Series Investors may get back their Money

NSEL e-series investors may now be able to recover investments

31/1/2014, Economic Times


More than 30,000 small and medium-sized investors who purchased gold and silver contracts of small denominations on defunct bourse National Spot Exchange (NSEL) might now be able to redeem metal worth a cumulative Rs 500-600 crore that’s stuck on the crisis-hit bourse.

Findings of a forensic audit – an accountancy exercise that determines the veracity and accuracy of financial statements — of the so-called e-series bullion contracts traded on NSEL has "broadly indicated" that the metals backing the contracts were intact and the funds used to purchase them did not belong to investors who pumped thousands of crores into paired contracts – contracts that involved a simultaneous purchase and sale of other commodities — said two persons aware of the development.

"The audit findings broadly indicate that money invested into the paired contracts was not used to purchase gold and silver backing the e-series contracts and importantly metal backing those contracts exists. These findings could, subject to legal decision, enable the exchange to complete settlement of the e-series contracts to small investors," one of the persons cited above said.

NSEL went bust in July last year after two dozen counterparties declared their inability to settle payments amounting to Rs 5,600 crore to more than 13,000 investors.

The exchange suspended the paired contracts but continued settlement of the e-series contracts. However, the settlement to e-series investors also was put on hold after two investors, who moved the Bombay High Court, alleged that money invested into paired contracts was used to purchase metal backing the e-series contracts. The HC in October last year suspended the settlement of the e-series and directed commodity market Forward Markets Commission to appoint a chartered accountancy firm to conduct a forensic audit of the contracts.

FMC selected Chokshi & Chokshi to conduct the audit. ET has learnt that the CA firm was due to submit the report to FMC on Thursday or Friday. While Mitil Chokshi, partner, Chokshi & Chokshi declined to confirm the submission date, FMC chairman Ramesh Abhishek was unavailable for comment.

Brokers said that any likely settlement of the eseries contracts could come as a major relief for investors of middle-class background who purchased small denominations of gold and silver on NSEL and whose deliveries were not affected after the NSEL crisis broke out.

"Most e-series investors are of middle and lower middle class background. It’s needless to say any settlement will come as a major relief for them," said Harish Galipelli, head of research JRG Wealth Management, who in his earlier stint with brokerage Karvy dealt with e-series investors.

Investors were able to purchase smaller denominations of gold and silver through the e-series contracts. Money invested by them was used by the bourse to purchase gold and silver from domestic bullion refiners, which they could hold in demat form with NSDL and CDSL. While intra-day trading wasallowed, outstanding positions at the end of the day resulted in delivery.


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Trading in e-Commodities Halted

Investors can take delivery or wait

With the government banning the e-series on NSEL, investors are likely to be stuck for some time.

Yogini Joglekar, Business Standard 6/8/2013


The ban of the e-series contract on the National Spot Exchange could put retail investors, who were betting on commodities, in trouble. The e-series contract was targeted towards small investors who could buy small quantities even up to one or two grams of their preferred commodity.

One could also use the systematic investment plan (SIP) route to accumulate gold or silver over a longer period of time. There was the option of getting these goods delivered to jewellers when one wanted to convert it into jewellery.

But after the government’s decision, which many experts say is a temporary one, retail investors who have been using this route to save gold will find themselves in trouble. According to experts, one option for them is to take delivery of the commodity and then, sell it in the market. It is quite a cumbersome process because taking physical delivery of gold or silver might not be huge in quantity but it is a risk that retail investors may not want to take. On the other hand, one may look at waiting out the tough period.

Unless the ban is revoked soon, SIP investors will find that their instalments aren’t going through. Chintan Modi, head of commodities at India InfoLine says, ‘It is the investor’s choice to either wait or discontinue the plan.’

At present, NSEL allows converting gold units into coins or bars of 8, 10, 100 gm and one kg. It charges Rs 200 each for conversion of 8 and 10 gm coins, Rs 100 for 100 gm and no charge for one-kg bar. You will also have to pay a value-added tax at one per cent and Octroi for conversion of electronic units into physical coins (for Mumbai = 0.1 per cent). Taking delivery of investments held in e-series can prove to be a tad expensive due to its various fees and charges.

For instance, one can take delivery in the form of coins, available in eight and 10, 100 grams or one kg at a cost of Rs 200, plus one per cent value added tax (VAT). Here, gold is bought in electronic form, and held in a demat account with an exchange empanelled depository participant. One unit of e-gold is equal to one gram of physical gold. One has to pay annual maintenance fee towards their Demat account which is in the range of Rs 400 and Rs 500. Since, the exchange has various delivery centers across India, Octroi charges (on delivery) will also have to be borne by the investor himself. The octroi charges will differ from city to city.

Hemant Rustagi of Wiseinvest says, ‘While e-gold is flexible and convenient to invest in, it is not as tax-friendly as gold ETFs.’ One can buy as low as one gram in products of E-series and one can do so even after the market hours However, it has its flip side too. ‘There is no long term capital gains tax if a person stays invested in e-series for 24 months, whereas the same benefit is available in gold ETFs and Gold savings plans right after 12 months.’ In addition, gold ETFs are not subject to wealth tax, unlike in case of E-gold.

other links:


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China Silver Demand to Climb to Record

Bloomberg News, 25/10/12


Silver demand in China, the world’s second-largest user, is set to jump as much as 10 percent next year to a record as investors look to preserve wealth, according to Beijing Antaike Information Development Co.

Consumption may climb to 7,700 metric tons after gaining 6 percent to 8 percent in 2012, Shi Heqing, an analyst at Beijing Antaike, said in an interview on Oct. 22. About 33 percent of the country’s demand comes from jewelry and coins, with the rest from industrial use in photography, solar and electrical appliances, according to Antaike, which has studied metals for two decades.

Investors in China are buying more silver as the second- largest economy slowed for a seventh quarter, the Shanghai Composite Index is heading for a third straight annual drop and property curbs are limiting prices. Silver climbed 15 percent this year and holdings by exchange traded funds gained 6.5 percent this year after touching 592 million ounces last week.

“Chinese investors want hard assets such as silver, especially when it’s cheaper than gold and requires less funding,” Shi said. “Many producers and investors have hoarded the precious metal in the form of ingots or unwrought silver.”

Silver rose 53 percent in the Federal Reserve’s first round of quantitative easing from December 2008 through March 2010, twice as much as gold, and 24 percent during the second phase ending in June 2011, three times as much. The U.S. central bank announced a third round of QE on Sept. 13. Silver will probably beat gold in the next several quarters, Morgan Stanley (MS)predicts.

Jewelry Sales

China’s jewelry sales jumped by 19.3 percent in the first eight months from a year earlier, Shi said, citing the National Statistics Bureau. The government doesn’t give a breakdown on jewelry sales.

“I’m bullish on silver, so I personally have stockpiled 3 tons of it at home,” Yang Guohui, president at Hunan Yishui Rare & Precious Metals Recycling Co., said in Xiamen on Oct. 17. Yishui is based in Yongxing County, Hunan province, where about 20 percent of China’s silver is from, according to Huang Xiaoming, head of the local precious metals management bureau.

The spread between Chinese and overseas prices is about $40 a kilogram because of import duties and transportation costs, Guan Bingren, a trader at Shanghai Hedge International Trading Co., said yesterday. The premium rose to more than $200 in May 2011 when investors bid up the metal on the Shanghai Gold Exchange amid a “frenzy” of speculation, Guan said.

Solar Industry

A recovery in the solar industry may add to demand, Shi said. The government is targeting 21 gigawatts of solar-power installations by 2015 after installing 2.6 gigawatts in 2011, according to Bloomberg New Energy Finance.

China’s economy expanded 7.4 percent in the third quarter, compared with 7.6 percent in the April-June period. The nation’s benchmark equity gauge, the Shanghai Composite Index, has declined about 3.8 percent in 2012. China’s September new home prices rose in fewer than half the cities monitored by the government from a month earlier.

Silver for December delivery on the Comex in New York traded at $32.115 an ounce at 3:28 p.m. in Beijing. Gold futures traded at $1,712.60 an ounce, making it 53 times more expensive.

Output in China, the third-biggest producer, may reach a record 13,000 tons this year from mining, smelting, refining and recycling, according to Wang Jian, deputy head of the China Nonferrous (1258) Metals Industry Association.

“You don’t feel there’s a huge oversupply of silver in the domestic spot market,” Shi at Antaike said. “It’s hard to estimate because it’s not transparent.”


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Why you should invest in silver now

By Ashna Ambre, Economic Times 25/6/2012


While everybody’s gushing about the returns gold has delivered over the past four years, it’s the yellow metal’s poorer cousin that has been winning the race. Silver prices have jumped from Rs 16,525 per kg in 2008 to Rs 75,020 per kg in 2011, a gain of 354%.

However, over the past few months Silver prices have dropped to a more affordable level of Rs 54,000 per kg. Does this mean the potential in silver is already exhausted?

"There is still some steam left in silver. Bullion is expected to go up, so silver prices too shall rise steadily in the medium to long term," says Jayant Manglik, president, retail distribution, Religare Broking.

What’s pushing the prices up?

Silver’s easy availability, diversified use and lower price relative to gold places it high in the list of industrial and investor preference. Silver is malleable, ductile, strong and can endure high temperatures, making it ideal to use in various industries, from electronics to pharma.

Over the past century, technological explosion has magnified the scale of its usage. Its demand is outpacing the supply and leading to large gaps, which is one of the reasons why silver prices have been zooming up. Since 2008, the price rise has been further propelled by the global economic uncertainty and the depreciation of the rupee due to the US economy outpacing the European Union.

Central banks and their governments across the globe have stopped selling their silver reserves in the world marketplace, thereby freezing the supply, which, has caused silver to become more scarce and valuable. When there is lack of confidence in fiat money and the financial system, silver can be a hedge against inflation.

During global turmoil, central bankers devalue their currency and the best way to escape this is to stick with gold and silver. Also, mining of the metal is expected to become more limited due to scarcity constraints in the future.

Silver is a precious metal and an industrial metal, and both sectors are dynamic and volatile in nature.

The smallest movement can cause large variations, so silver may incur moderate price fluctuations in the short run. However, the white metal mirrors gold and in the long run, gold prices may escalate, leading to a positive trickledown effect on silver prices.

"The Chinese economy is expected to bounce back from its downturn with an aim to increase industrial output, so its demand for silver would also shoot up," says Naveen Mathur, associate director, commodities and currencies, Angel Broking.

How to invest

If you want to invest in the white metal, here’s a look at the various ways you can do it.

Coins and bars: These can be bought from jewellery stores at prevailing market rates. Decorative coins involve making charges, though these are much lower than what jewellers charge for gold ornaments, but you will not be able to recoup the charges when you sell the coins. A problem is that if you make a sizeable investment, it may be difficult to find a big storage space to keep these secure.

E-silver: The uniformity in the price of silver across the nation and the success of E-gold encouraged the National Spot Exchange Limited (NSEL) to launch E-silver in April 2010. The silver is 99.9% pure and is available in small denominations of 100 gm and its multiples.

E-silver can be stored in your demat account so you don’t have to worry about finding a secure storage space. You can also opt for the SIP (systematic investment plan) route to invest in e-silver through the online trading platform of the NSEL or through a broker.

This will help you benefit from rupee cost averaging without having to track the markets regularly. Also, SIPs inculcate discipline that enables you to build wealth over time. Whenever you want to redeem your investment, the NSEL will provide the silver to you in physical form.

Silver futures: Trading in silver futures is similar to that for gold. Silver futures provide the advantage of leverage position. To avoid the hassles of delivery, you must offset the futures contract before the maturity date is reached.

US Silver ETFs and mining companies: Currently, silver exchange traded funds (ETFs) are not available in India. However, keen investors can put their money in silver ETFs that are available in the US. They can also buy stocks of silver mining companies that are listed on the Dow or Nasdaq.


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