The Hindu Business Line : Investing in information

Information plays a crucial role in commodity market movements. Collecting and collating data/information is a massive, time-consuming and expensive task. Importantly, intelligent analysis of data/information is necessary. This calls for special skills.

Quality information is expensive. "If knowledge is expensive, try ignorance" is a pithy statement that captures the hazards of not investing in knowledge. There is general reluctance on the part of market participants to pay for quality information. Often, there is little respect for intellectual property. But market conditions are changing rapidly. There is significant economic interest in commodities and the stakes are rising. The factors that influence the market are no longer local or regional but global. There is integration across markets, as funds flow from one to another.The Indian market is integrating with the global and subject to many influences. Therefore, it is crucial for market participants to be able to access reliable and timely information.

Demand for quality info

The boom in the commodity market and the potential for enormous growth have created an excellent opportunity for information service providers. Because the stakes are rising, market participants should be in a position to pay for quality information. Ideally, large players — whether in physical or derivatives markets — should set up their own commercial intelligence and research desk. Importantly, commercial banks, which have large exposure to the commodity market via lending to traders, must have their own commercial intelligence desk to track market dynamics.

Map market thought

Tracking the market goes beyond merely recording prices and attempting to project or extrapolate them. Commodity market participants ought to know how the market behaves. Knowing the market psychology is the key to success. Interestingly, commodity markets move not only on the basis of current demand and supply fundamentals, but also on the expectation of changes. In other words, today's price of a commodity for a forward position reflects expectation of changes in the fundamentals at a future point in time; and this expectation keeps changing/evolving constantly depending on various factors that continually impact the market. Therefore, the success of any participant would depend on his ability to reliably map the market thought.

One commodity at a time

Before young investors venture into commodity trading, they need to arm themselves with adequate product and market knowledge. Without this understanding, it is not possible to take informed decisions on how to trade, how much to trade, when to trade and importantly, when to quit.

How does one gain such knowledge? First, some desk research to understand market-moving factors. If you are a beginner, it is advisable not to look at too many heterogeneous commodities. Ideally, select one agri and one non-agri-commodity for a thorough study of the fundamentals, the dynamics and the market-moving factors.

Sugar and gold

In the case of agri-commodity, it could be sugar, wheat or the oilseeds complex (comprising oilseeds, oilmeals and vegetable oils). These are international commodities with a large and varied production and consumption base. There are well-established industry and trade bodies that regularly compile market information.

As for a non-agri commodity, what better than gold? Impacted by fundamental and non-fundamental factors, the gold market is volatile, with a high risk-reward profile. A study of the gold market will lead to a better understanding of the global economic and political situation. There is no dearth of information; so much is available on the Internet.

Once a certain measure of product and market knowledge about one or two commodities has been gained, one can study other commodities.

The next step would be prices. Several techniques are available for price forecasting or for price outlook. Fundamental and technical analysis are two popular tools used by traders for taking an informed view on prices. Next week, we shall see what these two analyses are and how they work.

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