A commodity supercycle can be defined as a long-term sinusoidal movement of commodity prices leading to a dramatic upswing and downswing trend that may last for a decade or more. The prices of the commodity are governed by the demand and supply laws of the market. Factors like overproduction, wars, lockdowns, and weather conditions may affect these commodities' demand and supply, leading to change in short-term prices. However, large-term patterns (which runs over decades) of supercycles are not significantly impacted.
Commodity prices go through long-term phases of price movements which are well above or below their large-term pricing pattern. These movements are called as upswings or downswings.
The upswings in the prices of commodities are strongly backed by industrialisation and urbanisation. The prices of commodity jump up as it gets strong demand with a slow-moving supply. On the other hand, as and when the supply quantity becomes adequate in the market and demand slows down, the super cycle enters the downswing phase.
Two factors contribute to demand volatility. The first is the dependence of demand on economic growth. Commodities are used for economic growth; if economic growth is slow, demand will be less and vice versa. The second reason for demand volatility is the stock volume of producers. During advanced economic scenarios, the demand for commodities increases as the manufacturers hold up more into their stocks, whereas the stocks become less, and demand falls during economic downturns.
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When we talk about the supply side, producers find it difficult to vary their production as per the market's demand as commodities are produced on a large scale with huge investment. Producers run their operations in a full-fledged manner for cost optimisation during the weak demand periods also. As a result of that market gets surplus, and prices of the commodity fall.
Super Cycles to date:
Market analysts have noticed various supercycles during the last and current century.
The first super cycle was observed in the late 19th century, and it lasted till the start of the 20th century. The US's industrialisation and the build-up of the German economy drove the commodity prices in a full-fledged manner to bring the first commodity supercycle.
The next bump was noticed before the second World War for global rearmament, which lifted the commodity prices.
The third wave was observed in the 1950s and 1960s, driven by Europe and Japan's reconstruction after World War II.
The most advanced commodity upswing was noticed at the beginning of 2008 when prices reached the lowest level for 20 years. Chinese industrialisation is the main driver of this swing. The prices reached their highest level in 2011 and then started to decline.
Copper is considered as the doctor that takes care of the economy's health. Since copper has a mysterious ability to diagnose the movement of the economy. Copper's demand as the base metal for vast industrial purposes, including factories, homes, electronic gadgets, wires, health equipment and others, make it suitable to diagnose the economy's health.
Is the year 2021 the beginning of the Supercycle?
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Commodities rose to their highest level since 2013. Collective bet, including net-zero emission targets by 2050 and government stimulus packages, has combinedly driven the commodity bulls. The copper prices hit above US$9,000 per metric ton on 23 February 2021, highest in last nine years, crude oil hit its highest mark in last one year. Coffee and Sugar prices are also rising. The commodity index has gained more than 60% since March lows.
It is too early to say that the supercycle has started or is underway, as some market experts commented that China's economic recovery would slow down in a while after registering an enormous post-pandemic rebound.
What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours. One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job. Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price. Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility. Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening. Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating. People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows. What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives. Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets. After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy. Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex. Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies. Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well. The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood. Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc. Real-time market information flow On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research. Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours. Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group. What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently. It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin. Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses. Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.
What are ETFs? ETFs are similar to funds where pooled money of investors is managed by a fund manager, who runs the ETF. These funds invest in equity, debt, commodity or any other asset class, depending on its offering. Good read: Mastering the Basics of Investing in ETFs Price of the ETF is based on a value of net assets in the fund and is subject to change each trading day consistent with underlying changes in the value of net assets. Since ETFs are traded in markets just like shares, the quoted price of an ETF either reflects a discount to its NAV or a premium to its NAV. Investors have flocked to ETFs because of low-cost proposition and opportunity to take exposure in a specific pool of assets, which are professionally managed by an investment team with the investment manager. Some ETFs are also used as a proxy to define sentiment in an underlying sector, commodity or index since ETFs are actively traded in market hours, incorporating the latest information in prices. Fund management businesses have continued launching new and innovative ETFs, which have seen great demand over the past. Read: Gold ETFs register massive capital influx; while PDI, GPP, ERM, AME, RED Under Investors’ Lens Large and popular ETFs have also defied liquidity problems because of large scale investor participation. But it remains a problem with lesser-known ETFs with small market participation. ETFs also pay distributions to the holders that are either derived through interest income, dividend income or capital gain. Active and Passive ETFs With ETFs markets growing strongly as ever, there remains a divide between active fund managers and passive fund managers. Passive investment strategies have grown immensely popular among market participants over time. This strategy is cost effective. Many seasoned investors such as Warren Buffett, John C Bogle- founder of the Vanguard Group have endorsed passive ETFs. Active ETFs do not track a benchmark, and performance is not tracked to any given index. These funds are based on countries, sectors, market capitalisation, asset classes, etc., and active investment management allows a manager to beat the returns delivered by broader markets or indices. If you look at the great investors like Warren Buffet, Philip Fisher or Peter Lynch, they have set themselves as a preamble for active investors, and their record of delivering sustainable returns over the long term continues to attract investors to active alleys of markets. Since Passive ETFs are designed to match returns of respective benchmarks, there is no scope of delivering outperformance no guarantee that fund will not underperform the benchmark. However, the expenses charged to investors are relatively lower compared to Active ETFs. Passive ETFs are cheaper than Active ETFs because the use of resources is limited in the former. Since they are designed to match the benchmark and its underlying securities, trading in Passive ETFs is mostly automated running on algorithms, and stock picking is not required, thereby no research. Read: ETFs: Investors Up the Ante and ETFs Run the Show for Long-Term Returns ETFs based on asset classes and style Sector ETFs: These are the most common type of ETFs in market. Sector ETFs track specific sectors like Information Technology, Consumer Staples, Consumer Discretionary, Metal & Mining. These are similar to index funds but are actively traded in stock exchanges. Equity ETFs: Equity ETFs may include equity-focused Sector ETFs. As the name suggests equity, these funds invest in stocks independently or are benchmarked to a specific index. Perhaps, Equity ETFs are the most common ETFs. Fixed Income ETFs: These funds invest in fixed income instruments and pay distributions out of the interest earned on bonds. Further Fixed Income ETFs can be separated as investment-grade ETFs, high-yield ETFs, Government bond ETFs. Commodity ETFs: Commodity ETFs invest in physical commodities like precious metal, agricultural goods, natural resource. These funds include products like Gold ETFs, Oil ETFs, Grain ETFs, Silver ETFs. Good read: Investing in Commodity ETFs Short ETFs: Also known as inverse ETFs, these funds are designed to benefit when the benchmark is falling. Short ETFs hold short positions in the benchmark index futures or constituents of the index to benefit from fall in value or prices. To know more about short selling read: Minting Money While the Asset Price Tanks; Enter the World of Short Selling Leveraged ETFs: Leveraged ETFs use derivatives to amplify the returns and risks of a fund. These are also called geared ETFs. Leveraged ETFs may also hold equity or bonds along with the derivatives to amplify the net asset value movement of funds. Do read: All You Need to Know About Exchange Traded Funds Why investors prefer ETFs? Passive investment vehicles continue to appear compelling to a large investor base, and there are numerous reasons driving the demand for passive investment vehicles. Low-cost and no minimum investment: ETFs have lower expenses compared to traditional mutual funds, and most of the funds have no minimum investment criteria. As a result, the market for ETFs has grown strong, due to its reach to investors with limited capital. Must read: Mutual Funds vs. ETFs: Which Are Better? Exposure to specific asset classes: Investors with large portfolio also use ETFs to enter to into specific asset classes like Gold ETF or Commodity ETF, but not limited to sector ETFs, theme-based active ETFs like technology, mobility, e-commerce etc. Portfolio diversification: ETFs provide investors with an opportunity to diversify a portfolio of concentrated stocks by including exposure to specific sectors, indices, and commodities. More importantly, the diversification is available at a low-cost investment, which further drives the need for ETFs in a portfolio. Accessibility: It is perhaps the most compelling value ETFs provide to investors. Since ETFs are available on stock exchanges like shares, investor participation remains strong, and some popular ETFs boast high liquidity levels. Read: Confused on How to Invest in ETFs? We Have Some Tips! Further read: 6 Reasons to look at ETFs
What are the Factors of Production? Production of anything requires inputs to produce an output, and the inputs used in the production are known as factors of production. Alternatively, these are resources used in the production of goods and services. Factors of production are also critical to economic growth given the economic growth requires expansion in output/national income or total production. Factors are a class of productive elements, which individually are known as units. Units are interchangeable and homogenous, moreover, they are perfect substitutes for each other. Factors, which constitute a group of units, are not a perfect substitute for each other. Modern economists prefer using ‘inputs’ instead of conventional factors of production: land, labour, capital and entrepreneurship. Classification of Factors of production Land Land includes all the natural resources available such as water and air. It constitutes a natural resource that yields income and is exchangeable for a consideration. In the absence of land, water and sun, a farmer cannot produce crops. Every commodity traded in the world can be traced back to land directly or indirectly. Such as gold is extracted from mines, crude oil is explored and extracted from oil fields, grains are produced in agricultural land. Moreover, the land is arguably the ultimate origination of commodities. Meanwhile, the quantity and quality of land are vital to yield an acceptable utility for the user. But the availability of land does not guarantee economic growth because the ability to use resource determines the optimal use of the resource. Land can be further classified as renewable and non-renewable. Renewable resources can be used again and again in the production like an agricultural land used year after year for the cultivation of food, grains etc. Non-renewable land is not usable again and again and is exhausted as the consumption increases. A gold mine may not yield additional income for a business when ore reserves are exhausted. And a new discovery would provide additional resource. Land, as a blessing of nature, is fixed in supply. Whether the demand increases or decreases, the supply of land will remain the same. As a result, it is not dependent on the price, therefore supply of land is perfectly inelastic. Labour Labour does include not only physical but also mental abilities that are done by humans for a monetary benefit. The contribution of labour depends on the size and quality of labour. For instance, Japan has been successful in the production of small and compact cars, while the US producers were efficient in slightly heavy cars. Higher productivity of labour will likely deliver favourable benefits. As a human factor, labour cannot be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot be separated. Labour is available in return of wages and is not a saleable commodity. While one cannot store labour for future use, the supply of labour is dependent on the need for production. Labour supply is elastic, and it takes time to develop overall supply. Division of labour emphasises on the speciality of labour in a particular work. Every labour group in an organisation is further classified into various divisions, depending on the quality, skills, knowledge and demand. Capital Capital is a critical factor of production and largely means wealth, which includes stock of raw material, machinery, tools, building etc. It is also the money available for productive and investment purposes. Capital also extends to physical assets such as machinery, raw material that are directly used in the production. Securities such as shares and bonds are not classified because they are not used in production, thus not the factor of production. It is largely classified into fixed capital and working capital. Fixed capital is used in the production continuously and incur wear and tear. Fixed capital does not mean it is immovable, but the essence of fixed is the cost incurred, which largely remains fixed over the period of production. The cost incurred in working capital is, however, recovered when the product is sold. Such as the cost of raw material, along with other inputs, is a component of the total cost of the good. Capital also includes human capital. Human capital is also a vital unit of production and means the education, skills, and health of people. It is essential for the improvement in productivity. It is now understood that investments in human capital provide favourable growth. Entrepreneurship Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty associated with the production. Now it is understood that production is a function of land, labour, capital, and entrepreneurship. Entrepreneurship is more concerned with the incorporation of production, rather business affairs, which are managed by other people working on wages. Therefore, an entrepreneur takes the risk and uncertainty associated with production. An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling the factors of production, including land, labour, capital and entrepreneurship. Innovation and development are also associated with entrepreneurship. Entrepreneurs undertake crucial decision of capital allocation, which may include setting up new factors, purchasing machinery, upgrading skills of human capital, innovating units of production etc. Elon Musk is an entrepreneur aspiring to reach mars, produce e-vehicles, launch space travel. He is effectively managing and bringing about the factor of production to achieve results.
What is meant by hedge? A hedge refers to a position taken by an investor to reduce risk related to the price movements of an asset. An investor hedges against risk by taking an offsetting position in the market for related securities. Since it is impossible to eliminate the risk completely associated with security, investors can only try to lessen it by taking opposing positions in the market. The offsetting position taken by an investor can be in the market of existing securities or in the market of related securities. How does a hedge work? Investors use derivatives to hedge against uncertainties in the market. Derivatives are contracts that hold an underlying real asset like a stock. To better understand the working of a hedge, an example would be helpful. Consider the case when an investor wants to buy a stock. However, there is a possibility that prices could decrease in the future, meaning the investor will face a loss if he sells in a bearish market. Thus, he wants to protect himself from reducing prices in the future. The current position held by the investor is that of a buyer of the security, therefore, an offsetting position for him would mean being the seller of the same security or related security. The most common and efficient method that helps protect from a price decline are options. In the above scenario, a put option can be bought alongside the security. Buying either a call or put option gives the right but not the obligation to buy or sell the underlying asset, respectively. Another way to hedge against risk is to diversify one’s portfolio by buying additional securities. This includes securities that do not rise or fall together so that if the investor faces loss in one security then the other securities, bring him a profit. What are the areas where options can be used to hedge? Investors can use hedging using options to protect against price volatility of various securities, including the following: Commodities: Commodity trading is one important area where investors want to hedge against changing commodity prices. For a commodity buyer, the risk would be that of increasing prices in the future. Thus, to secure himself, he/she can buy a call option. If the physical market prices do not increase, then the buyer can simply purchase the commodity from there. However, suppose the prices in the physical markets increase. In that case, the buyer can simply exercise the call option and buy the commodity at the previously fixed strike price lower than the market price. Securities: The same is true for securities like shares, equities, indices, etc. The risk linked to these securities is called security risk or equity risk. Consider an investor who is short selling shares of a stock at $10 per share and is unsure whether the prices of the share would increase or fall in the future. To hedge against the risk of increasing share prices, the investor can buy a call option with a strike price of $7 per share. If the market prices rise higher than $7 per share, the investor can simply exercise the call option and buy at a lower strike price than the market, giving him a profit. Currencies: These include foreign currencies, which have various types of risks, including exchange rate risk and volatility risk. Consider an Australian company with its operations in the US. Now, the US operations' profits would have to be exchanged at the existing AUD/USD rate However, the company can hedge against an exchange rate decline by buying a put option to sell USD. In this case the strike price would again act as the lowest threshold below which the company would not have to pay to get AUD. However, if the exchange rate does not decline and stays above the strike price then the company can simply buy AUD from the market and not exercise the option. Interest Rates: Interest rate hedging can be done using interest rate options. An interest rate call option gives the owner the right but not the obligation to benefit from rising interest rates. If the market interest rate is higher than the strike price, then the owner of the option can exercise the call option. On the contrary, an interest rate put option gives the holder the right but not the obligation to benefit from decreasing interest rates. Just like regular options, interest rate options also have a premium associated with them. Weather: Hedging can also be done against changing weather conditions. Weather derivatives may be used to hedge in such a scenario. For instance, firms that require a certain temperature to be maintained use something called “Heating Degree Days” or HDD as an index to trade in weather derivatives. Other indices may also be used, such as the number of cooling days, the number of days with rainfall, etc. What is meant by a natural hedge? A natural hedge refers to a hedge taken by an organization by adopting risk reducing operational methods. For example, a company that has operations in the US would be susceptible to exchange rate risk. However, if the company shifts its expenses to the US, then it could reduce its risk by minimizing exchange rate risk. A natural hedge does not require investment into any additional funds. Rather it is a hedge that can be attained by cutting down on existing operations or by adopting less risky methods. A natural hedge may occur in those instances too, when equity or any other security is not involved and only the business operations of a company are being hedged against risk. Why is hedging important? Hedging offers various benefits apart from minimizing investors’ risk. Hedging provides a fixed range under which the investor would incur a loss. This means that with unpredictable market price movements, an investor would not be able to calculate how much loss he would incur if the market contrary to his expectations. However, with hedging, this potential loss becomes known, and the investor can prepare himself for a loss within an expected limit. Investors can invest in various assets which provide greater liquidity to the market. Additionally, profits remain locked in for the investors through hedging.