Base metals: avenues to diversify

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: purpose of the investment outlay. Usually the purpose is either investment or trading but in the case of corporates an additional reason could be risk mitigation. In any case, the aim is either profit or protection of profit where the latter is done by hedging with commodity futures in exchanges like MCX and NCDEX.

When the purpose is investments, there are several ways of entering the markets for corporates and individuals. The first is to take futures positions in those base metals where you are taking a directional call-now this is an open position and will be open to the vagaries of market movements and is in fact speculation. In such trading calls, keeping a tight eye on international markets and technicals is a must as also following trends and understanding seasonality-for example, crude prices typically rise before winter in anticipation of rising requirements. Besides, regular trading discipline has to be maintained-strict stop losses trailing profits and avoiding averaging in view of potential cash flow crisis which is a characteristic of leveraged markets. Since closing prices are marked to market, the difference has to be paid/received everyday and in such a situation, even if you are eventually right, the cash flow could be stifling and may lead you to cut your position at the most inopportune moment. Therefore this strategy has to be undertaken keeping this risk in mind-much like the famous statement that the markets can remain irrational for far longer than you can remain solvent! So never underestimate the value of a disciplined and strategic approach to commodity investing.

There are certainly relatively safer investment avenues available as well. One of the favourites is arbitrage opportunity between markets and these could be spot-futures or calendar spreads (profiting from ‘abnormal’ differences in near month and far month contracts). In that case, you can play on increasing and decreasing difference in the price of metals between the current and far month contracts or even delivery spreads where delivery does happen - currently only bullion.