There's money in commodities

Investing in commodities can be a richly rewarding experience. Several commodities like gold, crude and copper have been in great demand over the last few years, which, in turn, has sent their prices soaring.

Indeed, for those investors looking for investment avenues beyond equity and debt, commodities may well be a sound option. Investing in commodities now is also simple due to the two new national multi-commodity exchanges in the country— Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

Food for thought The hot commodities and their hot performance

Investors, though, need to exercise caution while making investment decisions. Commodity markets are driven by global factors and require as much study as the stock markets. We have short listed five commodities that have been in the news recently.

Gold: The yellow metal rang in the New Year by hitting record highs. Gold prices have surged nearly 12 per cent over the last one-and-a-half months. This rally was mainly attributed to worries about the health of the US economy, the deepening crisis in global credit markets sparked by subprime crisis and higher food and energy prices leading to concerns about inflation. Says Kunal Shah, Analyst, Motilal Oswal Commodities Broker: “Gold is considered a safe haven in times of inflationary concerns.” The medium-term outlook for gold remains bullish.

Crude oil: Crude oil prices posted a new high of $100 per barrel on NYMEX and Rs 3,935 per barrel on MCX on the back of falling crude inventories and geopolitical turmoil during the first half of January 2008. The price rise was fuelled by a US energy department statement that it would spend $584 million by the end of September 2008 to buy crude oil to add to the US Strategic Petroleum Reserve. The medium-term outlook for crude oil remains bullish.

Jeera: Jeera prices have gone down significantly this year. On January 1, 2008, the March contract of jeera was trading at Rs 10,800 per quintal—it went down to as low as Rs 9,000 per quintal recently. This was largely due to expectations of a good crop this year. Due to favourable climate conditions, the new crop in February is expected to be around 2.3 million bags this year—an increase of almost 60 per cent over last year. The bearish trend in the commodity is likely to sustain due to slack domestic and export demand.

Chana: Chana has surged around 15 per cent over the last one month. Chana prices are trading at Rs 2,500 per quintal now. Lower carry-over stocks, a decline in the sowing areas and concerns over the damage to the crop in north India have triggered the fresh buying. The bullish trend is expected to continue.

Cardamom: Cardamom prices have gone up almost 40 per cent over the last three months to Rs 700 per kg—largely on the back of a tight supply position. Production declined by over 25 per cent during the entire harvesting cycle this season as plantations have been damaged due to extreme heat during the summers and heavy monsoon rains. Says Shah: “We expect some profit booking at current levels as prices have gone up sharply in a short span of time and demand from north India is likely to slow down.”