Written by : Jasper Karmann
Current : 1900
Write a comment
Write a comment
it's an industry that touches many parts of our lives it's a cornerstone of the modern industrial revolution yet it has been misunderstood and surrounded in mystery but now a new initiative has been launched one that aims to demystify the industry an industry called commodity trading recently launched in Singapore in front of an audience of dignitaries journalists and industry experts leading commodity trading firm traffic guru has created commodities demystified a guide to trading and the global supply chain what we felt there's a real lit need for the commodities industry to explain it how does trading we really want to target it so that anyone can really pick this up and say even though maybe somebody who knows quite a bit about the industry already make them across a piece that they weren't as familiar in the guide is split into three parts fundamentals of commodities how commodity trading works and commodity trading and financial markets together these sections give a brief overview of a complex industry the most common misconception about the commodity trading in industry is that we take large speculative bets on where we think prices are going and that's not the case at all we are very much a physical business grounded in risk management and fundamental logistics the commodity trading industry has always been very misunderstood if that misunderstanding has worked to the detriment of trading companies in terms of their relationship with bankers regulators the public at large and so this is an effort to try to demystify the industry demystify firms like traffic yura to make them more understood it's really about what need are we fulfilling in the economy providing a conduit from producers to consumers and managing the risk along the way but if we take ownership of the goods from producer consumer underpins our whole approach to managing risk and it's no coincidence the launch for this guide took place in the heart of one of the industry's most important markets we are the largest trading hub for commodities in Asia more than us 1 trillion dollars is traded annually out of the single market place and it's home to a majority of the world's majors in the commodities whether it's from energy and it's a gray or metals they all are congregated here to do business with Asia good afternoon ladies and gentlemen thank you all very much for coming it's very gratifying to see such a large and distinguished turnout for this event to launch our new publication through traffic or commodities demystified was the natural tendency of human beings to want a truck barter and exchange people think less about what goes into their phones or their house for the plastics that they use every day so what did the invited audience make of the guide it's wonderful for non traders I myself won a consumer and he really gives me a glimpse of what comedy trading is all about and in plain language it's a very meaningful that they make such a production you know to to tell us about what the companies were doing the general industry what they do they don't speculate and it's a very free honest and very open communication it is quite mythical or sometimes right you think of them as perhaps sometimes even disruptive speculators but now that you hear the talk top floor you know it's somebody else is doing the speculation it was a clear message and very easy to understand message to people that were forming in the audience some of us take whatever reason the banks have asked us to increase transparency understanding how we operate our businesses I think through the info bride not just it's gonna benefit myself I'm gonna bring it back to all my senior management my company and let them be educated and to find out more about demystifying commodities be sure to visit our dedicated microsite or our website at Trafigura com you
Thanks for your comment Tegan Segouia, have a nice day.
- Jasper Karmann, Staff Member
there are many reasons why you might want to have exposure to commodities in your portfolio one might be that you want to diversify away from equity and bonds another might be that you want to protect yourself from an inflationary spike driven by commodities and a third one might be that you just want to speculate on the price of oil whatever the reason we'll look at the drivers behind commodity prices so that you get a better understanding of the market itself and also how to get cost-effective exposure to the particular commodities which interest you now i'll also split it up into a section on uk funds and us funds so that you can use the chapters to scoot between the two at the end of the video so let's look at commodity exposure in your portfolio in a bit more detail let's start off by looking at what commodities are actually available we can categorize it into four broad groups of commodities and the first of those would be energy commodities that would include crude oil but also the products when we take crude oil and split it up into fractions so that would be things like natural gas but also other refined products like gasoline another popular set of commodities and portfolios are things like precious metals particularly gold but also silver platinum and palladium commodities would also include agricultural commodities such as grains like wheat and barley but also softs things like cocoa orange juice and then finally livestock so things such as pork bellies and then the final group would be industrial metals so that would include things like copper aluminium zinc and tin all of which are used for various manufacturing processes and which feed into other industries now one of the things that characterizes commodities is that they tend to have fairly high volatility and here i'm looking at their volatilities over the last five years now remember volatility is a typical percentage annual price move and the funds which tend to be most volatile are the ones which are single commodity funds so here at the top you can see crude oil for example but also some precious metals like palladium then we have petroleum but also other precious metals like platinum and silver so this volatility of around 28 or 26 percent would be higher than it would be for say a global equity fund or the s p 500 so this group of funds here would give you exposure to a broad basket of commodities and that diversification reduces their volatility and even for the least volatile commodity funds here at the bottom of the graph the volatility is around 11 or 12 percent and that is comparable with something like a global equity fund so just bear in mind that commodities may introduce risk to your portfolio because they do sometimes suffer sharp falls but also sharp rises if we're thinking about diversification then the correlation between these funds is very important so what i'm showing here is the relationships the correlations between these funds over a five-year period and this is for daily returns denominated in sterling what this tree shows you is the clustering of behavior amongst different commodity funds so for example at the top here you can see some precious metal funds here's a palladium fund a broad-based precious metals fund from wisdom tree and one that gives you exposure to platinum they're all clustered together in the tree because these are highly correlated funds if we look at the daily returns we'll see that they tend to move up and down together then this red cluster you can see here are all broad-based commodity funds these also tend to have high correlation then at the bottom of the graph we have gold and silver which clusters together because those two metals tend to move together with one another but then within each cluster you can see that the length of these nodes is very short and that means that these are highly correlated funds effectively they'll all give you identical exposure and that's also true of these two silver funds ssln and phsp and then finally we've got a branch at the bottom which is completely separate from the rest of the tree that's because these two tend to be very uncorrelated with the rest of the funds so that includes an oil fund pbrt and a broad-based composite fund uc90 which tracks a cmci index so the way you'd use this tree would be to choose commodities which are far apart on the tree for example it would make no sense to buy two of these gold funds because they effectively give you the same exposure but if you choose a gold fund from here and something from the broader commodity basket which is in red that would give you more diversification if you invest in commodities it's also important to understand what drives each particular market but the broadest categorization would be into risky commodities and safe haven commodities which is quite a short list so risky commodities would include say those energy commodities that we saw such as oil but also petroleum and it would also include things like industrial metals so generally when you see equity sell-off usually you'll see those risky commodities sell off too and then in the safe haven category there's gold all on its own that's because gold is often seen as a safe haven and there's a hedge against equity when people are scared so if we think about the drivers for the price of gold generally a low interest rate will push up the price of gold and that's the situation we've seen over the last decade when policy rates from the federal reserve say have been very close to their zero lower bound the reason for that is that gold is a wasting asset it doesn't generate an income so when interest rates increase people tend to prefer treasuries which are also safe which generate an income rather than gold which doesn't another driver of gold but also other commodities is that they're priced in dollars so in fact when the price of gold is high that's equivalent to saying that the dollar is weak so a generally weak dollar is good for the price of gold but also other commodities and what's specific about gold as we saw is that it's seen as a hedge against equity fear so when people do see a big equity market sell-off that tends to provide a fairly short-term lift to the price of gold if we look at energy commodities generally those have been driven historically at least the big surges by supply shocks which usually involve some kind of political instability or war in the middle east or as we've seen recently an invasion of ukraine by russia which is a big energy supplier so that's a supply shock but you can also have the price driven strongly by demand and that in turn is driven by economic activity so for example during the pandemic we saw lots of people not able to drive in their cars that reduced demand and it pushed down the price of oil now structurally over time what we're seeing is that people are moving away from fossil fuels to renewable energy so perhaps over many years we'll see this link between economic activity and oil prices start to break down but certainly for the time being that's not the case and the price of oil is very much driven by economic activit
Thanks Reina your participation is very much appreciated
- Jasper Karmann
About the author
I've studied comparative anatomy at University of Missouri-Kansas City in Kansas City and I am an expert in quantum technology. I usually feel happy. My previous job was order fillers, wholesale and retail sales I held this position for 24 years, I love talking about watching movies and relaxing. Huge fan of Trey Songz I practice equestrian: dressage and collect pez.
Try Not to laugh !
Joke resides here...