Will commodity prices touch the sky?

Feb 2, 2011

In this issue:
» India's demographic dividend in safe hands
» Scam tainted 2G licenses may not be cancelled
» Americans should buy house and gold says Trump
» Escrow accounts to protect realty loans
» ...and more!!

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Corporate results in the latest quarter have been ominous of hard times to come. Especially in terms of margin pressure for commodity dependant companies. Commodity prices in recent months have left companies with very little room to seek profits. Add to that rising salary costs and operational expenditure! This cyclical pressure on margins is not something that the companies are not used to. However, this time it is expected to be different. Prices across commodities and not just the precious metals are expected to shoot up over the longer term. Rise in consumption, shortage in production, natural calamities and socio political instability are expected to boost the momentum.

Take the case of rise in oil prices for instance. Despite lesser consumption by economies like the US, oil prices comfortably crossed the US$ 100 per barrel mark. Consumption by emerging economies like China and India shoulder part of the blame. But pricing power of cartels like the OPEC and political unrest in Egypt have had an important role to play in oil prices firing up. Drought in several wheat producing nations and bad cotton crops in China has squeezed the supply of these important commodities. Thus with the demand supply gap widening, commodities are expected to find their place under the sun.

Returns from precious metals beat those from stocks hands down in 2010. Several factors, including high government debt levels, may continue this trend. But that does not mean investors should go all out and invest in commodities. True, anxiety over inflation, trade curbs and regulatory uncertainty set an auspicious backdrop for the sterling rise in commodity prices. However, the Indian markets for retail investment in commodities are at a nascent stage. Hence investors would do well to participate in this bull run with utmost cautiousness.

Do you have commodities in your long term investment plan? Let us know your views or post them on our Facebook page.

 Chart of the day
The foreign exchange market is the largest and most liquid financial market in the world. Little wonder, India's economic influence is being seen on this front as well. As today's chart shows, India features amongst the financial markets witnessing higher growth in forex turnover in 2010 over that in 2007. As instability in global economies offer lucrative opportunities in the underlying currencies, the volumes of forex trade is only going to increase. And India may continue to remain an active participant in this evolution.

Data source: BIS

Tucked away in a small corner of most leading dailies was a very important piece of news we believe. It talked about the appointment of Mr S Ramadorai, the former TCS CEO as an advisor to the Prime Minister on skills development. It should be noted that this is the second time when a distinguished gentleman has been drafted into the Government. The first person being Nandan Nilekani, who is currently the chairman of the Unique Identification Authority of India.

Now, let us move on to why we think this is an important piece of news. Our mind harks back to an incident in China. It involved two of the world's richest men currently, Bill Gates and Warren Buffett. After the trip that took place in the year 1995, Buffett recalled how the two of them were travelling on a river, where a crew of Chinese men was pulling their boats across the sandbars. Buffett's hugely capitalistic mind made him to immediately comment that had these men given a chance, one of them could have perhaps turned out to be another Bill Gates.

And just as China, such Bill Gates wannabes abound in India as well. And the most important thing that is holding them back is the lack of necessary skills. This is the reason why the coming on board of Mr Ramadorai injects fresh hope that if not of Bill Gates' caliber, at least millions of employable people emerge from India as well. After all, it is the country's demographic dividend that is at stake.

The CAG (Comptroller Auditor General) report on the 2G licenses was the basis for the infamous telecom scam. A lot of hue and cry was made on the quantum of opportunity loss to the government and the granting of licenses to firms who did not meet regulatory requirements. So much so that the telecom minister, Mr. A Raja, was forced to resign from his post. The government promised to take strict actions against the wrongdoers. The opposition parties filed a petition asking for the cancellation of the licenses that had been wrongly allotted. They also requested for strict action against Mr. Raja as well as against the Prime Minister for not stopping the scam.

This just a recap of history. Fast forward to today. The Supreme Court says that it will not cancel the licenses of the companies "just because of the CAG report". It will examine the facts and allow adequate opportunity to the companies for submitting their defense against the accusations. The apex court has stated that just citing the irregularities followed in granting 2G licenses cannot be the sole basis of cancellation. It is good that the court is providing equal opportunity to the companies for presenting their case. However, we doubt that anything constructive would materialize from this entire process. The companies would either go scot free or pay some paltry penalty. And the CAG report would just become history.

Buy a house or buy gold. Real estate tycoon, Donald Trump, advocates that Americans should own tangible assets as confidence in President Barack Obama and the US recovery is fast on the wane. Oil prices are inflating rapidly and the dollar losing value, all leading to economic pressures. Jobs have also moved to various parts of the globe including India and China.

Trump comments, that at the rate that the dollar has been losing purchasing power, soon even a loaf of bread could cost US$ 25! Well, the way things are going in the world, advice may be the only thing we can get for free.

There has been quite some hoopla around the 'unique identification number' (UID). The mammoth project is to give all 1.2 bn Indians something like an American Social Security number, but more secure. It will definitely be a great milestone for the country. Given the reality that hundreds of millions of people lack documents, addresses or even surnames; this will be rather useful. It will play a crucial role in curbing corruption. It will also boost a wide range of businesses.

However, promising the end result seems incredibly tedious. Why, we are talking about the whole of India! Since October over one million people have been enrolled. But that is less than 0.1% of the population. And a lot of practical difficulties abound. The case of Britain is a stark example in this context. It has already put off plans for biometric identity cards. Partly, this has been due to worries about soaring costs and technical issues. It must be noted that the population of UK is about 62 m. So, building and running India's database is going to be a challenge as colossal as India itself.

The next time you buy a property from a real estate company, you might me making the payment not to the company, but to the RBI. This is if the central bank's plans materialize. The RBI has asked banks to put in place an escrow mechanism that will help them keep a close tab on the potential NPAs from the sector. Such an account will also help banks carefully observe the end use of funds lent to real estate companies.

In simple terms, an escrow account is a trust account in the name of the bank of the borrower. Payments from the customers (the property buyer in this case) of the borrower (the real estate company) are deposited in this account to meet obligations, such as loan servicing.

We believe this move is in the right direction. This is expected to bring in some transparency in the borrowings of the real estate sector. But on the other hand, given their background of shady dealings, realty companies might find this as another way the banks will use to tighten the noose around them.

Meanwhile, after being in the negative for quite a few sessions, the benchmark indices finally sprung to life today as the Sensex was trading well above 200 points higher at the time of writing. Other major Asian indices also closed in the positive today whereas Europe too is trading in the green currently.

 Today's investing mantra
"If you have good stocks and you really know them, you'll make money if you're patient over three years or more." - David Dreman

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5 Responses to "Will commodity prices touch the sky?"

Piyush Upendra Singh

Feb 11, 2011

No one would actually like to play the story of "Rising Commodity Prices"; nonetheless, with inflation surging to almost double figures, a retail investor is bound to look for an alternate betting options - which, at the moment,is now apparent in the form of Commodity Market. Also, consider the fact that Bank FDs are poised to fetch -ve returns (against current inflation figures).

For long term, we still would like to ride the bulls in the Equity.


vijay kotecha

Feb 3, 2011

please give me a willcommodity price touch the sky



Feb 2, 2011

i have sold copper @ 453 what is the target



Feb 2, 2011

While ending "The 5 minute Wrapup" always states that at the time of writing about SENSEX level. Please give the exact time. Say, 3.00 PM (IST). Thanks for your kind attention



Feb 2, 2011


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