Gold, silver prices on a tear. There are others too - Views on News from Equitymaster

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  • Nov 24, 2010 - Gold, silver prices on a tear. There are others too

Gold, silver prices on a tear. There are others too

Nov 24, 2010

Commodity prices - be it metals, oil, or agricultural commodities- have been on a tear in recent times. With excess money being printed and low interest rates, it is chasing the relatively scarce assets. However, one agricultural commodity has literally blown past the rest. We are referring to cotton, the commodity which we use pretty much all day, every day - right from our bed sheets at night, to our work clothes during the day. Cotton prices have risen by a shocking 74% in the past twelve months. In the last two months alone prices have moved up by about 30%.

Source: Cotton Incorporated

India is the second largest producer of cotton after China. It's therefore no surprise that India is also the second largest consumer of cotton after China. After all the two giant nations need to clothe their billion plus population. However, India consumes lesser that what its produces, thereby exporting the excess. The country is the second largest exporter of cotton, after USA. Pakistan comes a distant 4th on the list.

Source: Cotton Incorporated

We can also infer that China consumes much more cotton than it produces, making it the largest importer of the commodity. Being, the factory of the world, it requires the raw material to produce various clothing items.

Cotton production in China however, has fallen in recent times due to a decrease in plantation area. Farmers have been migrated from cotton to food crops which are relatively less volatile in prices. With increased consumption and a drop in production from the largest producer, no wonder cotton prices have been going through the roof.

How do increased prices affect India?
Cotton prices in India have been rising on account of increased demand from China. Further, Indian export restrictions also have had a role to play in this. In addition, floods in Pakistan added to a global supply glut. The Indian government owned Cotton Corporation of India (CCI) which was to buy cotton from farmers at a minimum support price (MSP), is now finding no suppliers. The wholesale prices are now way above the price CCI is willing to pay. Cotton traders may continue to hoard inventory unless their higher price demands are met.

With the stratospheric rise in cotton prices, garment makers have now been forced to raise prices to pass on the hike to the customers. Garment prices are thus expected to rise by around 10 to 20%. Textile mills are also facing tremendous margin pressure with labour and power costs increasing.

Thus precious metals are not the only commodities reaping the benefit of demand supply gap. But unlike them, the steep rise in prices of necessary commodities could have a very detrimental impact on global economy.

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2 Responses to "Gold, silver prices on a tear. There are others too"

Ravindran

Dec 3, 2010

Both gold and silver is the safest investment as the same is always in great demand. The demand is increasing day-by-day and as such investment will fetch very good return in future.

Ravindran

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Surendra Nathany

Dec 2, 2010

Gold and silver is one of the best investment option from the ancient time. The production of Gold and silver is limited but the consumption is very high in the ratio of production.
All countries keep gold in stock for strong their currency. World wise unsafe environment is also a big reason for increasing the price of gold and silver.

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