High networth individuals see glitter in commodities

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Naren Agarwal, a long-time investor in equities, never thought he would trade in commodities. Though he is invested in equities for a few lakh rupees, he hardly looked at commodities. But triggered by the interest generated in gold and other metals, he is beginning to understand that the value of commodities cannot fall below the cost of production.

For long, trading in commodities has been looked down upon. Investment in the equity market has always been considered glamorous. For many, commodities were an uncharted territory. But no longer.

Investors, particularly high net worth individuals (HNIs), have started looking at commodities trading feeling more confident abut them as also to diversify their portfolio.. The total value of trading at commodity exchanges going up to Rs 36.60 lakh crore during April-October 2009 against Rs 28 lakh crore in the same period last year, and analysts feel the interest will grow still further.

"Till a couple of years ago, they would not like the idea (of investing in commodities). Now, the situation has changed. We have seen some HNIs setting apart 20-40 per cent of their portfolio for commodities trading," Mr Ashok Mittal, Vice-President and Country Head of Karvy Comtrade, told Business Line.

"This year showed a marked difference as base metals have been rewarding since the start of this year. The rally in gold really helped in increasing interest in trading of commodities," Mr Anand James, a senior analyst of Geojit COMtrade, says.

"It (commodities trading) has not happened in India because of lack of experience and awareness.

"Now HNIs understand the need for diversification of their portfolio in order to de-risk," Mr Mittal explained.

Mr Mittal feels that the interest would further grow after the Forward Contracts (Regulation) Amendment Bill is passed in Parliament, that will widen the scope of commodities trading.

Interplay of markets

Additionally, with the advent of currency futures, the interplay of currency, commodity and equity markets has been closer than ever.

"Some currency traders even track gold for hedging their currency risk, making use of the yellow metal's correlation with the dollar," Mr Anand James feels.

"HNIs' exposure to commodities as an asset class, however, is subject to seasonal trends in commodities, but several HNIs have regularly parked as much as 70 per cent of their investible funds in commodities," he says.

HNIs now understand the depth and volume of this market, and how closely commodities respond to international cues. A recent example is the bearish view taken in pepper and steel by a few HNIs, as a strengthening rupee reduced the competitiveness of their (pepper and steel) price quotes in international markets, he explains. "We have a regular HNI clients contributing 40-50 per cent of our volumes," Mr Anand says.