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Trading Commodities is Not for Amateurs!

11 December 2006 - Features - Editor

Stock market operations can look deceptively simple and gloriously profitable! This is really the case during an overwhelming upswing in a major economy. However, stock market operations may look at disaster in the face when transactions are purely speculative without any business insight.

Stock market investment in commodities requires great domain expertise, and outstanding stochastic forecasting ability. Past trends may be relevant at times, but it takes years of field experience to spot the position on a particular lifecycle. Success in dealing in one kind of commodity is unrelated to the drivers of something else. Most stock market investors focus on a sharply defined area for sustained profits from commodities.

Energy can be the most difficult to predict because it is so dramatically affected by geo-political shifts. Airlines are forced to deal in fuel futures though it is not their business. The impact can be devastating when they have to take deliveries at prices at variance with actual market realities.

Agricultural commodities are the safest for agronomists. Satellite surveys of cropped areas and pest incidence can be modeled for fairly accurate forecasts of production, which is a major factor in output price fluctuations. However, the temptation to deal in futures when crops are in early vegetative stages can have crippling effects, because late stage fungal outbreaks can wipe out large tracts of crop. Some endemic diseases are cyclical and traders who have a global perspective can make money by predicting price trends in specific Exchanges.

Metals require great technical knowledge of industrial applications. Nanotechnology has thrown a spanner in the works, for many supply demand balances are in the process of dramatic upsets. However, bulk buyers and chemical engineers can make relatively safe guesses about futures in metals, though they may not tell everyone in the stock market about it! It is said that strategic metal sourcing by Japanese automobile manufacturers has played a decisive role in out-gunning Detroit.

Currencies and financial instruments are not as risky as energy, but few understand the macro-economic models which govern their futures. Financial institutions rely on this area of expertise to protect against exchange losses, and to leverage profits at the same time-definitely not for us small guys!

Do not lose heart because one commodity in which you can take spot delivery at any time is gold. The ruling rate does not matter because you or your successors will come out on top one day, and it is always liquid!

 


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