Market influencing factors

Ø Price movements of other metals.
Ø Inflation.
Ø Available supply verses Fabrication demand.
Ø Fluctuation in deficits and interest rates.
Ø Income level of the rural sector of the economy.

Silver is traded in International Exchanges like CBOT, DGCX, NYMEX and TOCOM while in India it is traded in MCX and NCDEX and NMCE.

Contract Specification of Silver:

Gold and Silver Ratio:

Silver can be an effective means of diversifying investment assets and preserving wealth against the ravages of inflation for the average investors. Although the value of silver may vary, it has an intrinsic value that is immutable and permanent. When the first coins were made over 2,500 years ago in ancient Greece, the ratio of gold to silver was generally between 10:1 and 13.5:1, depending on the relative proximity of gold or silver mines.  According to historic price ratio of silver to gold shows that about 10 ounces of silver would buy one ounce of gold, it means the ratio between gold and silver is 10:1.

The peiod between 1976 to 1980, was remarkable period of bull market in precious metals, showed the ratio 17:1. Again, when  the market entered into recession in the year 1990 and 1991, the ratio rose from 71:1 to 100:1.
 
It is evident from the past history is that we can expect silver to drop faster than gold during a recession, and silver will rise faster than gold during a bull market in the metals. The main driver for the rise in the silver price between 1976 and 1980, and the concurrent dropping in the ratio, was investment demand. 

But the recent monthly ratio is about a 75:1 ratio. It can be summerised by the below drawn chart that the gold and silver ratio lies between 47- 75  since November 2003 to November 2008 . It means silver is historically cheap as compared to gold.

A simple application of this observation is to trade silver for gold in the middle of a recession, when an expansion in the economy starts and demand for commodities also increases.

A quarterly event in US markets that occurs when the contracts for stock index futures, stock market index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. The simultaneous expirations generally increase the trading volume of options, futures and the underlying stocks by hedge strategists, arbitrageurs, and other investors, and occasionally increase volatility of prices of related securities and cause some pretty big swings in the stock market. This phenomenon is sometimes referred to as “freaky Friday”.

The final trading hour for that Friday is known as triple witching hour (3:00-4:00 P.M., New York Time). The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell. If you are a long-term investor, triple witching will have a minimal impact on you.

For instance, if a lot of people think that the next futures contract looks expensive, they may decide not to “roll” their contracts and instead buy the underlying stocks. That will add some buying pressure to the market and, if there’s not much else moving the market that day, drive stocks higher. Nowadays, many futures and options players unwind positions ahead of triple-witching Friday, so the effect has been dampened in recent years.

In the past, all contracts expired in the same hour, but steps were taken so that contracts now expire at the open as well as the close of the day instead of all at once. Smaller-scale witching days occur in the other eight months, usually on the third Friday, when other options, index options, and futures contracts expire concurrently.

With the introduction of Single stock futures, all four contracts expires on the same days, so triple witching has become quadruple witching.

The United States has two sources of heating oil: domestic refineries and imports from foreign countries.  Refineries produce heating oil as a part of the “distillate fuel oil” product family, which includes heating oils and diesel fuel. Distillate products are shipped throughout the United States by pipelines, barges, tankers, trucks and rail cars.   The United States produces about 85 percent of its heating oil, while the remainder is imported from Canada, the Virgin Islands and Venezuela.

Heating oil is commonly delivered by tank truck to residential, commercial and municipal buildings and stored in aboveground storage tanks located in the basements, garages, or outside adjacent to the building. Heating oil is very similar to diesel fuel. It is used to fuel furnaces in homes or buildings. It is usually dyed to distinguish it from taxed vehicle fuel.

India’s leading commodity exchange, MCX which has an array of energy contracts such as Brent crude oil, electricity, natural gas and ATF expanded it energy futures segment by launching futures trading in ` Heating Oil` for February, March and April months.

 
Factors Effecting Heating Oil Prices:

Seasonality in the demand for heating oil - When crude oil prices are stable, home heating oil prices tend to gradually rise in the winter months when demand is at the peak. 

Changes in the cost of crude oil - Since crude oil is a major price component of heating oil, changes in the price of crude oil generally affect the price of heating oil. Crude oil prices are determined by worldwide supply and demand.  Demand can vary worldwide with the economy and the weather condition while OPEC and other factors can influence supply.

Competition in local markets – Competitive differences can be substantial between a locality with only one or a few suppliers or dealers versus an area with a large number of competitors.  Consumers in remote or rural locations may face higher prices because there are fewer competitors.

Regional operating costs - Prices also are impacted by higher costs of transporting the product to remote locations.  

Heating oil is refined from crude oil so there is positive correlation between heating oil and crude oil prices. Most years, the price of Heating Oil climbs up to reach a high point in August. This coincides with consumers stocking up on oil for the winter. Some consumers lock in the price at this point and buy a full winter’s worth of oil, but many buy a smaller amount with the intention of restocking as needed. With the buying pressure off by October, the price of Heating Oil falls.

The yield of gur from sugar cane depends mostly on the quality of the cane and the efficiency of the extraction of juice.

Muzaffarnagar district in Uttar Pradesh has the largest jaggery market in India, followed by Anakapalli of Visakhapatnam district in Andhra Pradesh. These are the biggest and second biggest in the entire world respectively.

Manufacturing Process
Jaggery manufacturing is done on a small scale by a group of farmers. It can be produced, just by boiling the pure clarified sugarcane juice. Then it is filtered and boiled in wide, shallow iron pans with continous stirring and, simultaneously soda juice is added in required quantity. While boiling, brownish foams come at the top which are continuously removed to get golden yellow colour of jaggery. The consistency of the juice becomes thick and then it is poured into the small to medium sized iron or aluminum cans where blocks of jaggery are formed after cooling. Size of the blocks can vary from 1 kg. to 12 kgs. Finally, these blocks are packed in gunny bags. From 100 kgs. of sugarcane, 10 kgs. of jaggery is made. . There is only 5% or even less capital requirement for making gur as compared to sugar production. That is why it is within the reach of common sugarcane farmers also.

The process flow chart is as under:

Major Producers are : Brazil, India, EU, China and USA
Major Importer: Russia, Indonesia
Major Exporter: Brazil, EU, Thailand, Australia

Uses of Gur
· It provides health nutrition value.
· It is used to purify the blood and regulate the liver function.
· It is used for sweating milk, and preparing tea.
· It contains proteins, minerals and vitamins, which are essential constituents for the body.

LME Warehouse is a place where we can store and handle a multitude of non-ferrous products, including copper, zinc, aluminum, lead, tin, nickel and aluminum alloy. There are over 400 LME approved warehouses in approximately 35 locations covering the USA, Europe, the Middle and the Far East.

If you want to produce or to trade copper or tin, or whatever listed on the LME, you can sell the metal to one of the many big warehouse of the LME, all over the world, and can receive a warrant. This is a way to share the cost of these warehouses between the many industry participants and make it more efficient, to compete against other products.

In LME Warehouses certainty is possible because the metal stored in warehouses belongs to the owner of the warehouse receipt issued by the warehouse company when the metal is first placed in the warehouse.

Investor should also make sure that LME warrants and off warrants are also take into consideration while reading the LME stock scenario which is published by the London Metal Exchange each working day from Monday to Friday.

LME Warrant: A document of possession, issued by the warehouse company, for each lot of LME approved metal held within an LME approved facility is called “LME Warrant”. Warrants are issued as the means of delivering metal under LME contracts. The number of live warrants reported accounts for all warrants that apply to material that is good for LME delivery, which has not been cancelled.

Cancelled Warrant: The number of cancelled warrants indicates the number of warrants for material that have been taken off warrant but haven’t necessarily been moved from the warehouse. These cancelled warrants are reported on by the LME until they are physically moved from the warehouse. Cancelled warrants information is important in that it represents the change in stockpiles of metal, which may no longer be available at warehouses and is booked for removal or onward shipment. This information is a valuable indicator of consumption trends, which in turn can provide valuable information in price trends.

Whenever the cancellation activity increases, it means that more metal is embarked for withdrawal, which will, in turn have positive impact on metal prices. Cancel warrants should be used to compare with the total stock available in the warehouses. This will give a cancellation ratio, which would be different for different metal.
London Metal Exchange does not run or operate its own warehouses. In fact it approves geographical locations globally as good delivery points and then approves warehouse companies, which operates within those locations provided with specific facilities. Now, these approved warehouse companies set fixed rents, which is charged on yearly basis against the storage of LME- warranted metal. These rent charges are published by the exchange and become effective on the beginning of every new financial year i.e. 1st day of April every year. Also if there are any changes to the costs of the rent, in that case warehouse companies has to inform the exchange by giving notice, further which is given to LME members at least three months prior to the operative date.

Many of the participants in base metals markets would probably expect a strong negative relation between LME warehouse inventories and 3-month forward prices over long periods of time. In other words they would expect lower inventories to be associated with higher prices, and vice versa. However, the existence of a strong negative relationship between inventories and prices does not guarantee the profitable trading signals always as other economic factors also determine the prices. But somewhat analysis suggests that the market more often is slow to react, than not, to significant changes in LME inventories for most of the base metals.

A 42-gallon barrel of crude oil produces about 19.5 gallons of gasoline after refining. Oil is broken down into the following components: 19.5 gallons is used to produce gasoline, 9.2 gallons are used to produce distillate fuels (such as Heating Oil), 4.1 gallons go for the production of kerosene jet fuel, and 2.3 gallons are used in the production of residual fuels. The remainder is primarily for chemical production and lubricants.

Gasoline characteristics are also affected by other ingredients that may be blended into it, such as ethanol. Most of the fuel ethanol added to gasoline is made from corn grown in the United States. The gasoline performance must meet industry standards and environmental regulations that vary by location.

The world demand for gasoline averages about 20 million barrels a day. Of this, US consumes the most with an average daily demand of 8 million barrels a day. The demand increased to over 9 million barrels a day in 2007, but tempered to about 8.9 million barrels per day by December 2008. In 2007 U.S. refineries produced 90 percent of the gasoline used in the United States. Although the United States is the world’s third largest crude oil producer, less than 35 percent of the crude oil used by U.S. refineries is produced in the United States. Net petroleum imports (imports minus exports) accounted for 58 percent of total petroleum consumption. About 48 percent of net petroleum imports were from countries in the Western Hemisphere, 18 percent from the Persian Gulf, 22 percent from Africa, and 12 percent from other regions. Most gasoline is used in cars and light trucks. It also fuels boats, recreational vehicles, farm, construction, and landscaping equipment.

There are so many factors, which affect gasoline prices, many of which are unpredictable, such as natural disasters, changing governmental policies and evolving international relations. Uncontrollable environmental factors can significantly impact the price of oil and thus the price consumers pay for gasoline. Generally, the demand for oil in the form of gasoline rises during the summer, when automobile and air travel increase. Correspondingly, the price for gasoline tends to be higher during the summer months than it is during the remainder of the year, with other factors being constant. While this is not always the case, the price of gasoline is affected by the magnitude of demand and thus follows a somewhat seasonal fluctuation.

A future trading in gasoline is so popular, now gasoline futures are globally traded in New York Mercantile Exchange and Intercontinental Exchange.

The commodity market regulator Forward Markets Commission (FMC) has cleared Multi Commodity Exchange’s (MCX) will launch futures trading in gasoline.

The balance of payments comprises the current account, the capital account, and the financial account.

-The current account consists of the goods and services account, the primary income account and the secondary income account.
-The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents.
-The capital account in the international accounts shows (1) capital transfers receivable and payable; and (2) the acquisition and disposal of nonproduced nonfinancial assets.

The Current Account
The difference between a nation’s total exports of goods, services and transfers, and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities. The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country’s balance of trade (BOT). The BOT is typically the biggest bulk of a country’s balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.

Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker’s remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.

Capital Account
An account that tracks the movement of funds for investments and loans into and out of a country. The capital account makes up part of the balance of payments. The net result of public and private international investments flowing in and out of a country. The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.

The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.

Fiscal Deficit
When a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols.

Revenue Deficit
When the net amount received (revenues less expenditures) falls short of the projected net amount to be received. This occurs when the actual amount of revenue received and/or the actual amount of expenditures do not correspond with predicted revenue and expenditure figures.

Trade Deficit
An economic measure of a negative balance of trade in which a country’s imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.

Introduction

The ELSS schemes are tax saving schemes that invest their asset in equities. The ELSS schemes offer a tax rebate to the investors under specific provisions of the Indian Income Tax laws. Investments made in ELSS and pension schemes are allowed as deduction under section 80C of the Income-tax Act, 1961. A sum of up to Rs 1 lakh invested in them during the financial year will qualify as a deduction from the income of the individual. Tax-saving funds are a key part of any portfolio. The act also provides opportunities to investors to save on capital gains. Investments in the ELSS schemes have a lock in period for three years. Such investments, therefore, can work for unit holders for a fairly long time, long enough for the NAVs to appreciate. The returns however are not guaranteed as they ultimately depend on the market.

These funds, however being basically equity schemes carry high risk unlike a PPF or a NSC, where your investment grows at a steady pace. With equity funds, you risk losing your capital, let alone not earning a return. Investors should compare the tax-saving funds with the other choices before them, including National Savings Certificate (NSC) or Public Provident Fund (PPF) etc. However, it is to borne in mind that lock-in period under the scheme is the lowest in the ELSS when compared with the PPF and NSC. While the said schemes are debt oriented in nature, the ELSS schemes are equity oriented in nature.

There are two new fund offers of ELSS in the market
· HSBC Tax Saver Equity Fund.
· Lotus India Tax Plan.

Avantages of investing in an ELSS

Ø Potential for capital appreciation through equity exposure.
Ø Benefits under section 80C of the Income Tax Act.
Ø No tax on Capital Gains for investments made in these schemes.
Ø Dividends are tax free in the hands of the investor.
Ø Shorter lock-in period of 3 years compared to other tax saving instruments.
Ø 3 year lock-in period also has the benefit of minimizing volatility.
Ø Allows regular investments of small amounts through the SIP route.
Ø Historically, equity linked savings schemes have provided better returns as compared to other tax saving instruments over periods greater than 1 year.

Disadvantages of investing in an ELSS

Ø The only major disadvantage in investing in the ELSS funds is that they have a lock in period and an investor will not able to redeem his money before three years.
Ø There is no assurance or guarantee of returns

Suitability

An investor, who has a long-term horizon (due to the three year lock in period), is willing to take risk while investing in equity portfolio and has a tax liability to be taken care of.

Platinum is primarily an industrial metal. It is a critical material for many industries and is considered a “strategic metal” by the US Government as a military resource. It is very heavier metal and more expensive then Gold. Total demand for platinum falls into eight broad categories:

1. Automotive – used in catalytic converters, spark plugs, and sensors.
2. Jewellery – as a substitute for Gold.
3. Chemical processing – also as a general catalyst.
4. Electrical/electronics – for high-temperature and non-corrosive wires and contacts.
5. Glass – dies and process technology
6. Petroleum refining – as a catalyst for crude oil cracking.
7. Dental/Medical – equipment and reconstructive surgery.
8. Investment – bullion and coins.

Multi-Commodity Exchange, India’s top commodity platform in terms of turnover, has launched future trading in Platinum from 20.06.08. At present, Platinum is most traded in overseas commodity markets such as the New York Commodity Exchange and the Tokyo Commodity Exchange in Japan. In MCX contract is having market lot size of 500 gm and the price quote is in rupees per 10 gm ex-Mumbai.

India is the world’s biggest gold consumer importing over 700 tonnes of gold a year, but Platinum finds only small shelves in jewellery shops owing to its high price. According to MCX, India’s Platinum demand in the current fiscal year is estimated at 932 kg and is likely to grow at 10 percent each year.

In 2007, global supplies of 6.55 million ounces were more than matched by demand of 7.03 million ounces. In 2006, world supply of Platinum was of about 217,700 kg or 7 million troy ounces.

Since 2001 Platinum has been mountain in international market. It touches its lifetime high on dated 4th march 2008 @ 2299 Dollars and cents per troy ounce.

Major Producing Countries: South Africa, Russia, Japan
Major Consumer of Platinum: Europe, Japan, North America.

Weekly Chart of Platinum (NYMEX)

Now a question arises which type of margin is charged for transaction in commodity future. Four type of margin is charged in commodity future transactions. These are as follows:
· Initial Margin
· Mark –to-Mark Margin
· Special Margin
· Maintenance Margin

Initial Margin
Initial margin is the amount of money that is required to initiate a new position (enter a trade) on a futures contract. Investors have to pay margin to broker for initiating the position in futures, commonly used in trading futures and contracts for difference. Initial margin is usually set at a percentage of the value of the contracts being traded.

The minimum amount of the initial margin is set by the exchange and varies depending on the commodity, the commodity’s contract value, and how much and how quickly prices move up and down. The actual initial margins for most traders are set by futures commission merchants and are often higher than the minimums set by the exchange. e.g. If an investor wants to trade in gold and the price of 10 gm gold is 12000. The one lot size of gold is 1 kg. Before trading one lot of gold, investor should invest an initial margin that is Rs. 60000. (12000*100 = 1200000 @ 5 %).

Mark-to-Mark Margins:
Mark-to-market margins are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract executed (if it is entered into on that day) or the previous day’s clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.

Collecting mark-to-market margin on a daily basis reduces the possibility of accumulation of loss, particularly when futures price moves only in one direction. Hence the risk of default is reduced.

Special Margin
To curb the volatility a special margin is charged. In case of additional volatility, a special margin at such other percentage, as deemed fit by the Regulator/Exchange, may be imposed on either the buy or the sell side in respect of all outstanding positions. Removal of such Margins will be at the discretion of the Regulator/Exchange.

In addition to the above margins the Regulator/Exchange may impose additional margins on both long and short side at such other percentage, as deemed fit.

Maintenance Margin
Maintenance margin is the amount of commodity that is needed to maintain a position (stay in a trade). Initial margin is always higher that maintenance margin, so as long as the initial margin is covered, the maintenance margin is also covered. Usually, maintenance margin is approximately 75% of initial margin. When the funds remaining available in your margin account are reduced by losses to below a certain level, known as the maintenance margin requirement, you will be required to deposit additional funds to bring the account back to the level of the initial margin. Or, you may also be asked for additional margin if the exchange raises its margin requirements.
For example, if the initial margin for gold is $2,000 and the maintenance margin is $1,500, you would need to have $2,000 allocated from your account as initial margin to trade the gold contract. Should losses on your position amount to, say, $600, the value of your initial margin would be reduced to $1,400, which is below the $1,500 maintenance margin requirement. Therefore, excess funds in the amount of $600 from your account would be automatically allocated towards bringing the initial margin figure back to $2,000. If there were not excess funds in the account to bring the initial amount back up to $2,000, the trader would have to meet the margin call immediately or else the position would be liquidated.