SlideShare a Scribd company logo
shamikbhose@yahoo.com or shamikbhose@rediffmail.com * See Profile on facebook.com & linkedin.com


FX is a Commodity, not an Asset ; “How to generate Alpha in FX as an Asset class”, is FX an asset at all?

FX is not an Asset, but rather a Commodity : Some interesting observations about correlations among different markets
note the following strong correlations:

1) The DJIA to the US $ index

2) The DJIA to the Reuters/Jeffries CRB index

3) US $ index to gold

4) US $ index to crude oil

DJIA to US $ index: There is a strong negative correlation between the two.

10 Years (1999-2008)    -51%

5 Years (2004-2008)     -58%

2007                   -69%

2008                   -89%

2009                   -92%

Note the higher correlation since the economic meltdown --conclusion was the $ index would remain weak due to stable
interest rates and that would produce one more rally in the DJIA looking for an Oct high.

DJIA to Reuters/Jeffries CRB index--There is a strong positive correlation between the two.

10 Years (1999-2008)          59%

5 Years (2004-2008)           51%

2008                     86%

2009                     88%

Conclusion - if the DJIA was set for another rally into Oct, then the CRB would also rally sometime in the 4th quarter.

US $ index to gold and crude oil --There is a strong negative correlation between the $ index and both gold and crude oil.
However, crude oil's correlation has strengthened while gold's has weakened.
2007 US $/gold          -91%

2007 US $/crude oil       -96%

2008 US $/gold          -76%

2008 US $/crude oil       -82%

2009 US $/gold          -64%

2009 US $/crude oil       -96%

2010 Euro / Gold – negative inverse co-relation

Conclusion -- if the US $ index stays weak, crude oil was soon set for another rally even though there is a
seasonal tendency for crude oil to weaken from the last week of Sep until the first week of Dec. One can take
argument with some conclusions but the strikingly high correlations in the $ versus crude oil and the $ versus
the DJIA need to be watched closely….

On commodity markets

Great bull run in commodities from 1906 – 23, 1933-53, 1968-82 average duration 18 years, new run begins
from 1999 and or 2003, can last till 2014 or 2022 Metal / mineral prices high but inflation adjustment can take
them higher in the next decade from time to time.

 In 2006 summer cotton , soybean, sugar, coffee, wheat, corn, rubber, rice, prices on an average 50-66% lower
than all time high. Perhaps 70-80% by inflation adjusted levels. Commodities will function with its own
demand supply disruption, new find scenario , with each having its own phase of correction and up treads.
There will be supply shocks in some and demand driven trends in others

 Inflationary trends will be up due to high price of commodities, thus interest rates will be on a vicious cycle
from time to time, thus share prices will move inversely against commodities ; As the dollar weakness will be
a wind behind this commodity uptrend --commodity currency’s like the Canadian $ will be firmer over the
next decade.

 Does not have the features of an asset; FX is not an asset because it hasn't got that most essential feature of an
asset, which is to provide a utility to the asset holder independent of any changes in the price of the asset after
its purchase, for significantly long periods of time after its purchase. For instance, a car provides the utility of
transport, a house provides the utility of shelter, a factory produces the utility of production and so on. All of
these assets are fed with some inputs – car with fuel, house with electricity, factory with raw materials - and
they produce the utility they are meant to provide. Their ability to produce utility is dependent on the
continued supply of inputs, and not on any extraneous change in the market price of the asset itself. Of course,
looking at it the other way round, the market price of an asset can vary in accordance with its ability/ inability
to produce the desired utility, but that's a different point altogether.
Financial assets such as stocks, bonds or bank deposits provide the utility of returns by the very virtue of
ownership – either interest in the case of bonds and deposits, or dividend (in most instances) in the case of
stocks. These returns are accruable to the owner, irrespective of the changes in the market price of the stocks/
bonds. The prices of all assets, whether physical or financial, can rise or fall – producing capital gains or losses
– but all assets continue to provide, over time, the utility they are supposed to provide, irrespective of these
price changes. Yes, all physical assets depreciate with wear and tear, which reduces their ability to provide
utility, but that is, as said earlier, another matter.

Currencies do not have this characteristic of assets. Currencies are a means of exchange. They are used to buy
assets or commodities. Yes, they do provide a utility – they enable the exchange of goods and services, they
enable commerce. But the provision of this utility is dependent on the price of the currency itself, through
inflation/ deflation in the domestic arena or through appreciation/ depreciation vis-à-vis other currencies in
the international arena. This is an essential difference between currencies and other assets. Further, unlike
financial assets like stocks, bonds or bank deposits, the mere possession of currencies does not necessarily
provide a return. You would have to make a deposit in a bank to earn interest. Note then, that it is the deposit
that earns interest, not the currency itself. Yes, there can be gains or losses due to changes in the price of the
currency, but the currency itself produces no returns. As such, it would seem that whatever else currencies
might be, they are not assets.

More like a commodity ; Perhaps currencies are more akin to commodities? Most commodities, such as fuel,
metals, wood, chemicals and others, become useful when used as an input in a productive process. The mere
possession of the commodity does not necessarily produce a benefit. Similarly, currencies produce a benefit or
utility when used as a means of exchange in trade and commerce and in capital transactions. Further, the
holding period for most commodities, especially in the physical form, tends to be short. This is in contrast to
assets, which the Average Joe wants to hold for a long period of time. Holding a commodity is seen as holding
inventory and no one wants to hold inventory for very long, because there are costs attached to carrying that
inventory.

Apart from the cost of storage, the biggest cost of holding commodities is the risk of a fall in prices. Of course,
there are chances of prices rising as well, but statistically, the chance of a rise in commodity prices tend to be
more or less equal to the chances of a fall over a long period of time. Similarly, the holding of currencies brings
with it more or less equal chances of a rise or fall in prices. This is unlike the case of assets (like houses, or
factories, or gold or brand name), where the chances of a rise in prices are, in the long run, greater than the
chances of a fall. There is, thus, prima facie, a disincentive for most people to hold onto commodities or
currencies for very long periods of time, or in excess of their requirements, especially in the physical form.

Of course, an entire industry thrives on the holding of commodities. But, this is usually in the form of futures
or options. Here too, we find that the holding period for most futures or options tends to be rather short,
especially in comparison with the holding period for even financial assets. The open interest in most Futures
markets, for both commodities and currencies, tends to be concentrated in the first three months, with the first
month having the highest open interest. People are, for the most part, interested in trading the commodity or
the currency, buying and selling it for small profits in short periods of time. Few people tend to hold a
commodity or currency futures for periods beyond three months. In fact, a few minutes to a few hours is the
norm for the greater number of participants in the currency market. Clearly, therefore, gains in the currency
market are in the nature of trading gains (which is a characteristic of commodities), rather than capital gains
(which is a characteristic of assets).
* See articles & notes in www.slideshare.net & www.scribd.com & www.slideshare.net

Further, it is an oft-quoted fact that the global currency market is the biggest market in the world, with
volumes approaching $3 trillion per day. The market for the G7, or Major, currencies is highly liquid and not
amenable to “cornering” or “price rigging”. Individual participants in the market have no hope of influencing
price. So much so that these days even Central Banks, especially of the G7 countries, have largely given up on
the practice of Intervention. The global currency market is the closest that one can ever come to the utopian
concept of Perfect Competition in a market, where there are a large number of participants, there is no barrier
to entry or exit of participants and everybody shares instantaneous and complete information.

In effect, the global currency market is a wholesale market, the biggest of them all. And, wholesale markets
deal in commodities, not assets. We do not find Rembrandts, Picassos, Van Goghs, or Bikash Bhattacharjees
being traded in wholesale markets. Maruti 800s, and even Honda Citys, are commodities, when compared to
cars like Ferraris and Porsches, leave alone F1 cars.


How does this help? Alright, suppose the debate is settled, or at least, it is personally settled for me (until
someone with better logic unsettles me) that currencies are commodities, not assets, how does that help in
generating better returns, or Alpha?

Firstly, we realize that all “returns” in commodity (and currency) trading is Alpha because the commodity
produces no returns on its own. Secondly, we can shun some of the techniques of investing in assets, such as
“Buy and Hold”. Thirdly, we realize that while all returns in currency trading is Alpha, the Alpha, in turn, is
generated from trading. Thus, we start looking for ways of trading better.

We can draw inspiration from the fruit or vegetable seller, whether he be running a small shop, or he be a
wholesaler. Both look to make a small margin on each sale and would rather let the stock go at cost than to see
it go waste at the end of the day, resulting in a loss. He does not look to, on an average, make more per kilo or
ounce sold, than is available in the market at the going price.

Cut to the currency market ; If we act like the fruit seller, we will change our tactics. Instead of trying to figure
out things like, “Is the Euro, or the Yen, going to go up or down”, we will try and spend more time working
out how much profit per trade is generally possible to achieve. Having known that, we will try and increase
the number of trades we do wherein we can get that average profit per trade we are looking for. This will also
help us control our greed and we will not mind cutting losses fine and getting out of a trade at a meagre profit,
or at cost, or at worst, a meagre loss. Disinvesting ourselves of the notion that we are investors will help us
become better Currency Traders and thus help us generate Alpha.

 Did Deflation fears really help rally the oil markets ? Oil prices popped as the dollar index dropped hitting
the lowest level since last April. The market seems convinced that the Euro zones problems are behind us so it
appears that the carry commodity trade is back in play but could we see more problems up ahead? Of course
while the dollar has been trending lower and the Euro higher is this a sign that we are headed for a bout of
commodity price inflation or are the markets more worried about deflation?
This kind of talk of course is bullish for commodities. As I have said from the first day that the Fed went to
quantitative easing that the Fed just printed a floor under commodities. By creating inflation and money out of
thin air the Fed changed not only the underlying value of a depreciated dollar but its entire price structure in
regards to other commodities. If the Fed chooses they can create commodity price inflation and they hope
some demand as they try to inspire economic activity by flooded the world with dollars.




This is why oil prices remain stubbornly high despite a global glut of supply. Quantitative easing and
essentially negative real interest rates has probably added a $10 to $25 a barrel premium to a barrel of oil.
With the talk or more quantitative easing being too short commodities is a more dangerous proposition.

At anytime they can run the printing press and change the fate of a commodity or at least its price. Of course
there are dangers to this policy. If the printing of money cannot inspire banks to lend and stir economic
activity and job creation then all that is left is commodity price inflation that may restrict the type of growth
that is necessary to promote the type of economic activity to restore the economy back to a normal path. So
what now should be apparent that at this stage of the recovery we now know that the Fed cannot do it on its
own? The Fed has done what it had to do but now it now up to the lawmakers down in Washington. The next
step that has to be taken is to make a plan to bring out of control spending under control and to cut corporate
tax rates to restore confidence. Expect volatility and fear to continue in the face off policy imbroglios in most
major currency capitals………..

shamikbhose@yahoo.com or shamikbhose@rediffmail.com * See Profile on facebook.com & linkedin.com

More Related Content

What's hot

July 7 I Session 2 I GBIH
July 7 I Session 2 I GBIHJuly 7 I Session 2 I GBIH
July 7 I Session 2 I GBIH
GBIHSupport
 
Mbf 13
Mbf 13Mbf 13
Daily comex report malaysia 21 Dec 2018
Daily comex report malaysia 21 Dec 2018Daily comex report malaysia 21 Dec 2018
Daily comex report malaysia 21 Dec 2018
Epic Research Pte. Ltd.
 
Intermarket Analysis for Cybertraders: Where Bitcoin Fits In
Intermarket Analysis for Cybertraders: Where Bitcoin Fits InIntermarket Analysis for Cybertraders: Where Bitcoin Fits In
Intermarket Analysis for Cybertraders: Where Bitcoin Fits In
George Samuel Samman
 
Intermarket analysis and btc
Intermarket analysis and btcIntermarket analysis and btc
Intermarket analysis and btc
George Samuel Samman
 
Currency Wars
Currency WarsCurrency Wars
Currency Wars
Kannan Rajarathnam
 
Currency wars
Currency wars Currency wars
Currency wars
Kannan R
 
Comex report-malaysia-10th-jan-2019
Comex report-malaysia-10th-jan-2019Comex report-malaysia-10th-jan-2019
Comex report-malaysia-10th-jan-2019
Epic Research Pte. Ltd.
 
Beware: Bear Market Straight Ahead
Beware: Bear Market Straight AheadBeware: Bear Market Straight Ahead
Beware: Bear Market Straight Ahead
Jon Markman
 
Market Roundup September 9th 2009
Market Roundup September 9th 2009Market Roundup September 9th 2009
Market Roundup September 9th 2009
kevtherev
 
Exchange Rate Management
Exchange Rate ManagementExchange Rate Management
Exchange Rate Management
Bhavya Shah
 
June 29 I Session 1 I GBIH
June 29 I Session 1 I GBIHJune 29 I Session 1 I GBIH
June 29 I Session 1 I GBIH
GBIHSupport
 
July 12 I Session 1 I GBIH
July 12 I Session 1 I GBIHJuly 12 I Session 1 I GBIH
July 12 I Session 1 I GBIH
GBIHSupport
 
Mcx Daily Report 07 Oct 2019
Mcx Daily Report 07 Oct 2019Mcx Daily Report 07 Oct 2019
Mcx Daily Report 07 Oct 2019
Myra Cheng
 
IRCBS 2015 FP Presentation Exp
IRCBS 2015 FP Presentation ExpIRCBS 2015 FP Presentation Exp
IRCBS 2015 FP Presentation Exp
Burnett Marus, RFC
 
Currency Project
Currency ProjectCurrency Project
Currency Project
dpark1
 
Weekly commodity-report 15- oct -2013 by epic research
Weekly commodity-report 15- oct -2013 by epic researchWeekly commodity-report 15- oct -2013 by epic research
Weekly commodity-report 15- oct -2013 by epic research
Epic Research Limited
 
Newsletter 03202016 Final Volume 2 Issue 2
Newsletter 03202016 Final Volume 2 Issue 2Newsletter 03202016 Final Volume 2 Issue 2
Newsletter 03202016 Final Volume 2 Issue 2
Jonathan M. Lamb
 
Functional Finance for Fixed Exchange Rate Economies
Functional Finance for Fixed Exchange Rate EconomiesFunctional Finance for Fixed Exchange Rate Economies
Functional Finance for Fixed Exchange Rate Economies
pkconference
 
TermProject
TermProjectTermProject
TermProject
Saikrishna Poddutur
 

What's hot (20)

July 7 I Session 2 I GBIH
July 7 I Session 2 I GBIHJuly 7 I Session 2 I GBIH
July 7 I Session 2 I GBIH
 
Mbf 13
Mbf 13Mbf 13
Mbf 13
 
Daily comex report malaysia 21 Dec 2018
Daily comex report malaysia 21 Dec 2018Daily comex report malaysia 21 Dec 2018
Daily comex report malaysia 21 Dec 2018
 
Intermarket Analysis for Cybertraders: Where Bitcoin Fits In
Intermarket Analysis for Cybertraders: Where Bitcoin Fits InIntermarket Analysis for Cybertraders: Where Bitcoin Fits In
Intermarket Analysis for Cybertraders: Where Bitcoin Fits In
 
Intermarket analysis and btc
Intermarket analysis and btcIntermarket analysis and btc
Intermarket analysis and btc
 
Currency Wars
Currency WarsCurrency Wars
Currency Wars
 
Currency wars
Currency wars Currency wars
Currency wars
 
Comex report-malaysia-10th-jan-2019
Comex report-malaysia-10th-jan-2019Comex report-malaysia-10th-jan-2019
Comex report-malaysia-10th-jan-2019
 
Beware: Bear Market Straight Ahead
Beware: Bear Market Straight AheadBeware: Bear Market Straight Ahead
Beware: Bear Market Straight Ahead
 
Market Roundup September 9th 2009
Market Roundup September 9th 2009Market Roundup September 9th 2009
Market Roundup September 9th 2009
 
Exchange Rate Management
Exchange Rate ManagementExchange Rate Management
Exchange Rate Management
 
June 29 I Session 1 I GBIH
June 29 I Session 1 I GBIHJune 29 I Session 1 I GBIH
June 29 I Session 1 I GBIH
 
July 12 I Session 1 I GBIH
July 12 I Session 1 I GBIHJuly 12 I Session 1 I GBIH
July 12 I Session 1 I GBIH
 
Mcx Daily Report 07 Oct 2019
Mcx Daily Report 07 Oct 2019Mcx Daily Report 07 Oct 2019
Mcx Daily Report 07 Oct 2019
 
IRCBS 2015 FP Presentation Exp
IRCBS 2015 FP Presentation ExpIRCBS 2015 FP Presentation Exp
IRCBS 2015 FP Presentation Exp
 
Currency Project
Currency ProjectCurrency Project
Currency Project
 
Weekly commodity-report 15- oct -2013 by epic research
Weekly commodity-report 15- oct -2013 by epic researchWeekly commodity-report 15- oct -2013 by epic research
Weekly commodity-report 15- oct -2013 by epic research
 
Newsletter 03202016 Final Volume 2 Issue 2
Newsletter 03202016 Final Volume 2 Issue 2Newsletter 03202016 Final Volume 2 Issue 2
Newsletter 03202016 Final Volume 2 Issue 2
 
Functional Finance for Fixed Exchange Rate Economies
Functional Finance for Fixed Exchange Rate EconomiesFunctional Finance for Fixed Exchange Rate Economies
Functional Finance for Fixed Exchange Rate Economies
 
TermProject
TermProjectTermProject
TermProject
 

Viewers also liked

Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
guestf79d1b7
 
Shamik Bhose October Crude Oil Views
Shamik Bhose  October Crude Oil ViewsShamik Bhose  October Crude Oil Views
Shamik Bhose October Crude Oil Views
Shamik Bhose
 
Indian Groundwater Crisis
Indian Groundwater CrisisIndian Groundwater Crisis
Indian Groundwater Crisis
Shamik Bhose
 
Gold Road Resources
Gold Road ResourcesGold Road Resources
Gold Road Resources
melaniegraystokes
 
Fasanara Capital | Investment Outlook June 2012 (published May 25th)
Fasanara Capital | Investment Outlook June 2012 (published May 25th)Fasanara Capital | Investment Outlook June 2012 (published May 25th)
Fasanara Capital | Investment Outlook June 2012 (published May 25th)
Fasanara Capital ltd
 
Grand Finale2003
Grand Finale2003Grand Finale2003
Grand Finale2003
sadanand sukhdan
 
6 Ways NOT To Shake Hands
6 Ways NOT To Shake Hands6 Ways NOT To Shake Hands
6 Ways NOT To Shake Hands
Bernard Marr
 

Viewers also liked (7)

Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9Csc3 Inv Products Ch 9
Csc3 Inv Products Ch 9
 
Shamik Bhose October Crude Oil Views
Shamik Bhose  October Crude Oil ViewsShamik Bhose  October Crude Oil Views
Shamik Bhose October Crude Oil Views
 
Indian Groundwater Crisis
Indian Groundwater CrisisIndian Groundwater Crisis
Indian Groundwater Crisis
 
Gold Road Resources
Gold Road ResourcesGold Road Resources
Gold Road Resources
 
Fasanara Capital | Investment Outlook June 2012 (published May 25th)
Fasanara Capital | Investment Outlook June 2012 (published May 25th)Fasanara Capital | Investment Outlook June 2012 (published May 25th)
Fasanara Capital | Investment Outlook June 2012 (published May 25th)
 
Grand Finale2003
Grand Finale2003Grand Finale2003
Grand Finale2003
 
6 Ways NOT To Shake Hands
6 Ways NOT To Shake Hands6 Ways NOT To Shake Hands
6 Ways NOT To Shake Hands
 

Similar to Fx Commodity Corelation

Pm132 education portfolio_diversification
Pm132 education portfolio_diversificationPm132 education portfolio_diversification
Pm132 education portfolio_diversification
nasinasiya1
 
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
EconReport
 
The Advisory_March2016
The Advisory_March2016The Advisory_March2016
The Advisory_March2016
Jim Tyson
 
Brexit Impact on UK Real Estate - Elysian
Brexit Impact on UK Real Estate - ElysianBrexit Impact on UK Real Estate - Elysian
Brexit Impact on UK Real Estate - Elysian
Mandana Dabbagh
 
Economic Review And Outlook
Economic Review And OutlookEconomic Review And Outlook
Economic Review And Outlook
guestfd180e4
 
CIO Newsletter
CIO NewsletterCIO Newsletter
CIO Newsletter
Tata Mutual Fund
 
CIO Newsletter - Jan 2016
CIO Newsletter - Jan 2016CIO Newsletter - Jan 2016
CIO Newsletter - Jan 2016
Prof. Simply Simple
 
Why foreign exchange rates change
Why foreign exchange rates changeWhy foreign exchange rates change
Why foreign exchange rates change
Sameer Nawab
 
Whitepaper from CFTC Analyzing Correlations Between Equities And Commodities
Whitepaper from CFTC Analyzing Correlations Between Equities And CommoditiesWhitepaper from CFTC Analyzing Correlations Between Equities And Commodities
Whitepaper from CFTC Analyzing Correlations Between Equities And Commodities
John Farrall, CFA
 
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
lorainedeserre
 
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
jesusamckone
 
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
Lewis Larsen
 
201502lo1
201502lo1201502lo1
201502lo1
Patrick A Heller
 
June 23 I Session 2 I GBIH
June 23 I Session 2 I GBIHJune 23 I Session 2 I GBIH
June 23 I Session 2 I GBIH
GBIHSupport
 
Foreign exchange market
Foreign exchange marketForeign exchange market
Foreign exchange market
wasim yousuf
 
Currency correlation in forex
Currency correlation in forexCurrency correlation in forex
Currency correlation in forex
Aaron Paul
 
August Market Outlook
August Market OutlookAugust Market Outlook
August Market Outlook
Dan Hassey
 
2018 01-25 hm
2018 01-25 hm2018 01-25 hm
2018 01-25 hm
Mats Larsson
 
The New Gold Seasonal Trends
The New Gold Seasonal TrendsThe New Gold Seasonal Trends
The New Gold Seasonal Trends
Shamik Bhose
 
Commodities Market.docx
Commodities Market.docxCommodities Market.docx
Commodities Market.docx
Rohit551834
 

Similar to Fx Commodity Corelation (20)

Pm132 education portfolio_diversification
Pm132 education portfolio_diversificationPm132 education portfolio_diversification
Pm132 education portfolio_diversification
 
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
Oct./2005-Jan/2006--Economic Report FY2006 Q1-Q2 (Full Report)
 
The Advisory_March2016
The Advisory_March2016The Advisory_March2016
The Advisory_March2016
 
Brexit Impact on UK Real Estate - Elysian
Brexit Impact on UK Real Estate - ElysianBrexit Impact on UK Real Estate - Elysian
Brexit Impact on UK Real Estate - Elysian
 
Economic Review And Outlook
Economic Review And OutlookEconomic Review And Outlook
Economic Review And Outlook
 
CIO Newsletter
CIO NewsletterCIO Newsletter
CIO Newsletter
 
CIO Newsletter - Jan 2016
CIO Newsletter - Jan 2016CIO Newsletter - Jan 2016
CIO Newsletter - Jan 2016
 
Why foreign exchange rates change
Why foreign exchange rates changeWhy foreign exchange rates change
Why foreign exchange rates change
 
Whitepaper from CFTC Analyzing Correlations Between Equities And Commodities
Whitepaper from CFTC Analyzing Correlations Between Equities And CommoditiesWhitepaper from CFTC Analyzing Correlations Between Equities And Commodities
Whitepaper from CFTC Analyzing Correlations Between Equities And Commodities
 
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
 
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
2Evaluating StocksEvaluating StocksLearning Team BFIN402.docx
 
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
Lattice Energy LLC-Larsen Memo re Stock Indexes vs Gold Price Ratios-August 1...
 
201502lo1
201502lo1201502lo1
201502lo1
 
June 23 I Session 2 I GBIH
June 23 I Session 2 I GBIHJune 23 I Session 2 I GBIH
June 23 I Session 2 I GBIH
 
Foreign exchange market
Foreign exchange marketForeign exchange market
Foreign exchange market
 
Currency correlation in forex
Currency correlation in forexCurrency correlation in forex
Currency correlation in forex
 
August Market Outlook
August Market OutlookAugust Market Outlook
August Market Outlook
 
2018 01-25 hm
2018 01-25 hm2018 01-25 hm
2018 01-25 hm
 
The New Gold Seasonal Trends
The New Gold Seasonal TrendsThe New Gold Seasonal Trends
The New Gold Seasonal Trends
 
Commodities Market.docx
Commodities Market.docxCommodities Market.docx
Commodities Market.docx
 

More from Shamik Bhose

Shamik Gold Standard & Reasons 2011 Sept
Shamik Gold Standard & Reasons 2011 SeptShamik Gold Standard & Reasons 2011 Sept
Shamik Gold Standard & Reasons 2011 Sept
Shamik Bhose
 
Shamik 0n Yasni Google
Shamik 0n Yasni GoogleShamik 0n Yasni Google
Shamik 0n Yasni Google
Shamik Bhose
 
Shamik On Gold & Silver Breakout
Shamik On Gold & Silver BreakoutShamik On Gold & Silver Breakout
Shamik On Gold & Silver Breakout
Shamik Bhose
 
Shamik On Gold & Etf Presentation
Shamik On Gold & Etf PresentationShamik On Gold & Etf Presentation
Shamik On Gold & Etf Presentation
Shamik Bhose
 
Shamiks Crude Oil Overview 1 Summer 12
Shamiks Crude Oil Overview 1 Summer 12Shamiks Crude Oil Overview 1 Summer 12
Shamiks Crude Oil Overview 1 Summer 12
Shamik Bhose
 
A Crude Oil Overview Part 2 Summer 2012
A Crude Oil  Overview Part 2 Summer 2012A Crude Oil  Overview Part 2 Summer 2012
A Crude Oil Overview Part 2 Summer 2012
Shamik Bhose
 
Apres Nous Le Deluge
Apres Nous Le DelugeApres Nous Le Deluge
Apres Nous Le Deluge
Shamik Bhose
 
The Outlook Collection On Gold
The Outlook Collection On GoldThe Outlook Collection On Gold
The Outlook Collection On Gold
Shamik Bhose
 
Part I Deflation Or Devalue
Part I   Deflation Or DevaluePart I   Deflation Or Devalue
Part I Deflation Or Devalue
Shamik Bhose
 
Part Ii Gold Standard Redux
Part Ii   Gold Standard ReduxPart Ii   Gold Standard Redux
Part Ii Gold Standard Redux
Shamik Bhose
 
Shamik Bhose Gold As Money
Shamik Bhose Gold As MoneyShamik Bhose Gold As Money
Shamik Bhose Gold As Money
Shamik Bhose
 
Commodity Wealth Creation
Commodity Wealth CreationCommodity Wealth Creation
Commodity Wealth Creation
Shamik Bhose
 
Chaos Theory
Chaos TheoryChaos Theory
Chaos Theory
Shamik Bhose
 
The Consequences Are Profound
The Consequences Are ProfoundThe Consequences Are Profound
The Consequences Are Profound
Shamik Bhose
 
Ray & Santiniketan, a little drop of dew
Ray & Santiniketan, a little drop of dewRay & Santiniketan, a little drop of dew
Ray & Santiniketan, a little drop of dew
Shamik Bhose
 
Shamik bhose profile as director of commodity & currency
Shamik bhose profile as director of commodity & currencyShamik bhose profile as director of commodity & currency
Shamik bhose profile as director of commodity & currency
Shamik Bhose
 
Shamik Bhose On Gold As Money
Shamik Bhose On Gold As MoneyShamik Bhose On Gold As Money
Shamik Bhose On Gold As Money
Shamik Bhose
 
Shamik Bhose Rationale Method Of $ Decline
Shamik Bhose Rationale Method Of  $ DeclineShamik Bhose Rationale Method Of  $ Decline
Shamik Bhose Rationale Method Of $ Decline
Shamik Bhose
 

More from Shamik Bhose (18)

Shamik Gold Standard & Reasons 2011 Sept
Shamik Gold Standard & Reasons 2011 SeptShamik Gold Standard & Reasons 2011 Sept
Shamik Gold Standard & Reasons 2011 Sept
 
Shamik 0n Yasni Google
Shamik 0n Yasni GoogleShamik 0n Yasni Google
Shamik 0n Yasni Google
 
Shamik On Gold & Silver Breakout
Shamik On Gold & Silver BreakoutShamik On Gold & Silver Breakout
Shamik On Gold & Silver Breakout
 
Shamik On Gold & Etf Presentation
Shamik On Gold & Etf PresentationShamik On Gold & Etf Presentation
Shamik On Gold & Etf Presentation
 
Shamiks Crude Oil Overview 1 Summer 12
Shamiks Crude Oil Overview 1 Summer 12Shamiks Crude Oil Overview 1 Summer 12
Shamiks Crude Oil Overview 1 Summer 12
 
A Crude Oil Overview Part 2 Summer 2012
A Crude Oil  Overview Part 2 Summer 2012A Crude Oil  Overview Part 2 Summer 2012
A Crude Oil Overview Part 2 Summer 2012
 
Apres Nous Le Deluge
Apres Nous Le DelugeApres Nous Le Deluge
Apres Nous Le Deluge
 
The Outlook Collection On Gold
The Outlook Collection On GoldThe Outlook Collection On Gold
The Outlook Collection On Gold
 
Part I Deflation Or Devalue
Part I   Deflation Or DevaluePart I   Deflation Or Devalue
Part I Deflation Or Devalue
 
Part Ii Gold Standard Redux
Part Ii   Gold Standard ReduxPart Ii   Gold Standard Redux
Part Ii Gold Standard Redux
 
Shamik Bhose Gold As Money
Shamik Bhose Gold As MoneyShamik Bhose Gold As Money
Shamik Bhose Gold As Money
 
Commodity Wealth Creation
Commodity Wealth CreationCommodity Wealth Creation
Commodity Wealth Creation
 
Chaos Theory
Chaos TheoryChaos Theory
Chaos Theory
 
The Consequences Are Profound
The Consequences Are ProfoundThe Consequences Are Profound
The Consequences Are Profound
 
Ray & Santiniketan, a little drop of dew
Ray & Santiniketan, a little drop of dewRay & Santiniketan, a little drop of dew
Ray & Santiniketan, a little drop of dew
 
Shamik bhose profile as director of commodity & currency
Shamik bhose profile as director of commodity & currencyShamik bhose profile as director of commodity & currency
Shamik bhose profile as director of commodity & currency
 
Shamik Bhose On Gold As Money
Shamik Bhose On Gold As MoneyShamik Bhose On Gold As Money
Shamik Bhose On Gold As Money
 
Shamik Bhose Rationale Method Of $ Decline
Shamik Bhose Rationale Method Of  $ DeclineShamik Bhose Rationale Method Of  $ Decline
Shamik Bhose Rationale Method Of $ Decline
 

Recently uploaded

Top mailing list providers in the USA.pptx
Top mailing list providers in the USA.pptxTop mailing list providers in the USA.pptx
Top mailing list providers in the USA.pptx
JeremyPeirce1
 
Mastering B2B Payments Webinar from BlueSnap
Mastering B2B Payments Webinar from BlueSnapMastering B2B Payments Webinar from BlueSnap
Mastering B2B Payments Webinar from BlueSnap
Norma Mushkat Gaffin
 
Understanding User Needs and Satisfying Them
Understanding User Needs and Satisfying ThemUnderstanding User Needs and Satisfying Them
Understanding User Needs and Satisfying Them
Aggregage
 
Company Valuation webinar series - Tuesday, 4 June 2024
Company Valuation webinar series - Tuesday, 4 June 2024Company Valuation webinar series - Tuesday, 4 June 2024
Company Valuation webinar series - Tuesday, 4 June 2024
FelixPerez547899
 
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesEvent Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
Holger Mueller
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
Adam Smith
 
How MJ Global Leads the Packaging Industry.pdf
How MJ Global Leads the Packaging Industry.pdfHow MJ Global Leads the Packaging Industry.pdf
How MJ Global Leads the Packaging Industry.pdf
MJ Global
 
Income Tax exemption for Start up : Section 80 IAC
Income Tax  exemption for Start up : Section 80 IACIncome Tax  exemption for Start up : Section 80 IAC
Income Tax exemption for Start up : Section 80 IAC
CA Dr. Prithvi Ranjan Parhi
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
Adam Smith
 
Best practices for project execution and delivery
Best practices for project execution and deliveryBest practices for project execution and delivery
Best practices for project execution and delivery
CLIVE MINCHIN
 
Authentically Social by Corey Perlman - EO Puerto Rico
Authentically Social by Corey Perlman - EO Puerto RicoAuthentically Social by Corey Perlman - EO Puerto Rico
Authentically Social by Corey Perlman - EO Puerto Rico
Corey Perlman, Social Media Speaker and Consultant
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
fisherameliaisabella
 
Creative Web Design Company in Singapore
Creative Web Design Company in SingaporeCreative Web Design Company in Singapore
Creative Web Design Company in Singapore
techboxsqauremedia
 
BeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdfBeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdf
DerekIwanaka1
 
Observation Lab PowerPoint Assignment for TEM 431
Observation Lab PowerPoint Assignment for TEM 431Observation Lab PowerPoint Assignment for TEM 431
Observation Lab PowerPoint Assignment for TEM 431
ecamare2
 
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
taqyea
 
Training my puppy and implementation in this story
Training my puppy and implementation in this storyTraining my puppy and implementation in this story
Training my puppy and implementation in this story
WilliamRodrigues148
 
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
SOFTTECHHUB
 
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your TasteZodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
my Pandit
 
Part 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 SlowdownPart 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 Slowdown
jeffkluth1
 

Recently uploaded (20)

Top mailing list providers in the USA.pptx
Top mailing list providers in the USA.pptxTop mailing list providers in the USA.pptx
Top mailing list providers in the USA.pptx
 
Mastering B2B Payments Webinar from BlueSnap
Mastering B2B Payments Webinar from BlueSnapMastering B2B Payments Webinar from BlueSnap
Mastering B2B Payments Webinar from BlueSnap
 
Understanding User Needs and Satisfying Them
Understanding User Needs and Satisfying ThemUnderstanding User Needs and Satisfying Them
Understanding User Needs and Satisfying Them
 
Company Valuation webinar series - Tuesday, 4 June 2024
Company Valuation webinar series - Tuesday, 4 June 2024Company Valuation webinar series - Tuesday, 4 June 2024
Company Valuation webinar series - Tuesday, 4 June 2024
 
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesEvent Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challenges
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
 
How MJ Global Leads the Packaging Industry.pdf
How MJ Global Leads the Packaging Industry.pdfHow MJ Global Leads the Packaging Industry.pdf
How MJ Global Leads the Packaging Industry.pdf
 
Income Tax exemption for Start up : Section 80 IAC
Income Tax  exemption for Start up : Section 80 IACIncome Tax  exemption for Start up : Section 80 IAC
Income Tax exemption for Start up : Section 80 IAC
 
The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...The Influence of Marketing Strategy and Market Competition on Business Perfor...
The Influence of Marketing Strategy and Market Competition on Business Perfor...
 
Best practices for project execution and delivery
Best practices for project execution and deliveryBest practices for project execution and delivery
Best practices for project execution and delivery
 
Authentically Social by Corey Perlman - EO Puerto Rico
Authentically Social by Corey Perlman - EO Puerto RicoAuthentically Social by Corey Perlman - EO Puerto Rico
Authentically Social by Corey Perlman - EO Puerto Rico
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
 
Creative Web Design Company in Singapore
Creative Web Design Company in SingaporeCreative Web Design Company in Singapore
Creative Web Design Company in Singapore
 
BeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdfBeMetals Investor Presentation_June 1, 2024.pdf
BeMetals Investor Presentation_June 1, 2024.pdf
 
Observation Lab PowerPoint Assignment for TEM 431
Observation Lab PowerPoint Assignment for TEM 431Observation Lab PowerPoint Assignment for TEM 431
Observation Lab PowerPoint Assignment for TEM 431
 
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
一比一原版新西兰奥塔哥大学毕业证(otago毕业证)如何办理
 
Training my puppy and implementation in this story
Training my puppy and implementation in this storyTraining my puppy and implementation in this story
Training my puppy and implementation in this story
 
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
Hamster Kombat' Telegram Game Surpasses 100 Million Players—Token Release Sch...
 
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your TasteZodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Taste
 
Part 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 SlowdownPart 2 Deep Dive: Navigating the 2024 Slowdown
Part 2 Deep Dive: Navigating the 2024 Slowdown
 

Fx Commodity Corelation

  • 1. shamikbhose@yahoo.com or shamikbhose@rediffmail.com * See Profile on facebook.com & linkedin.com FX is a Commodity, not an Asset ; “How to generate Alpha in FX as an Asset class”, is FX an asset at all? FX is not an Asset, but rather a Commodity : Some interesting observations about correlations among different markets note the following strong correlations: 1) The DJIA to the US $ index 2) The DJIA to the Reuters/Jeffries CRB index 3) US $ index to gold 4) US $ index to crude oil DJIA to US $ index: There is a strong negative correlation between the two. 10 Years (1999-2008) -51% 5 Years (2004-2008) -58% 2007 -69% 2008 -89% 2009 -92% Note the higher correlation since the economic meltdown --conclusion was the $ index would remain weak due to stable interest rates and that would produce one more rally in the DJIA looking for an Oct high. DJIA to Reuters/Jeffries CRB index--There is a strong positive correlation between the two. 10 Years (1999-2008) 59% 5 Years (2004-2008) 51% 2008 86% 2009 88% Conclusion - if the DJIA was set for another rally into Oct, then the CRB would also rally sometime in the 4th quarter. US $ index to gold and crude oil --There is a strong negative correlation between the $ index and both gold and crude oil. However, crude oil's correlation has strengthened while gold's has weakened.
  • 2. 2007 US $/gold -91% 2007 US $/crude oil -96% 2008 US $/gold -76% 2008 US $/crude oil -82% 2009 US $/gold -64% 2009 US $/crude oil -96% 2010 Euro / Gold – negative inverse co-relation Conclusion -- if the US $ index stays weak, crude oil was soon set for another rally even though there is a seasonal tendency for crude oil to weaken from the last week of Sep until the first week of Dec. One can take argument with some conclusions but the strikingly high correlations in the $ versus crude oil and the $ versus the DJIA need to be watched closely…. On commodity markets Great bull run in commodities from 1906 – 23, 1933-53, 1968-82 average duration 18 years, new run begins from 1999 and or 2003, can last till 2014 or 2022 Metal / mineral prices high but inflation adjustment can take them higher in the next decade from time to time. In 2006 summer cotton , soybean, sugar, coffee, wheat, corn, rubber, rice, prices on an average 50-66% lower than all time high. Perhaps 70-80% by inflation adjusted levels. Commodities will function with its own demand supply disruption, new find scenario , with each having its own phase of correction and up treads. There will be supply shocks in some and demand driven trends in others Inflationary trends will be up due to high price of commodities, thus interest rates will be on a vicious cycle from time to time, thus share prices will move inversely against commodities ; As the dollar weakness will be a wind behind this commodity uptrend --commodity currency’s like the Canadian $ will be firmer over the next decade. Does not have the features of an asset; FX is not an asset because it hasn't got that most essential feature of an asset, which is to provide a utility to the asset holder independent of any changes in the price of the asset after its purchase, for significantly long periods of time after its purchase. For instance, a car provides the utility of transport, a house provides the utility of shelter, a factory produces the utility of production and so on. All of these assets are fed with some inputs – car with fuel, house with electricity, factory with raw materials - and they produce the utility they are meant to provide. Their ability to produce utility is dependent on the continued supply of inputs, and not on any extraneous change in the market price of the asset itself. Of course, looking at it the other way round, the market price of an asset can vary in accordance with its ability/ inability to produce the desired utility, but that's a different point altogether.
  • 3. Financial assets such as stocks, bonds or bank deposits provide the utility of returns by the very virtue of ownership – either interest in the case of bonds and deposits, or dividend (in most instances) in the case of stocks. These returns are accruable to the owner, irrespective of the changes in the market price of the stocks/ bonds. The prices of all assets, whether physical or financial, can rise or fall – producing capital gains or losses – but all assets continue to provide, over time, the utility they are supposed to provide, irrespective of these price changes. Yes, all physical assets depreciate with wear and tear, which reduces their ability to provide utility, but that is, as said earlier, another matter. Currencies do not have this characteristic of assets. Currencies are a means of exchange. They are used to buy assets or commodities. Yes, they do provide a utility – they enable the exchange of goods and services, they enable commerce. But the provision of this utility is dependent on the price of the currency itself, through inflation/ deflation in the domestic arena or through appreciation/ depreciation vis-à-vis other currencies in the international arena. This is an essential difference between currencies and other assets. Further, unlike financial assets like stocks, bonds or bank deposits, the mere possession of currencies does not necessarily provide a return. You would have to make a deposit in a bank to earn interest. Note then, that it is the deposit that earns interest, not the currency itself. Yes, there can be gains or losses due to changes in the price of the currency, but the currency itself produces no returns. As such, it would seem that whatever else currencies might be, they are not assets. More like a commodity ; Perhaps currencies are more akin to commodities? Most commodities, such as fuel, metals, wood, chemicals and others, become useful when used as an input in a productive process. The mere possession of the commodity does not necessarily produce a benefit. Similarly, currencies produce a benefit or utility when used as a means of exchange in trade and commerce and in capital transactions. Further, the holding period for most commodities, especially in the physical form, tends to be short. This is in contrast to assets, which the Average Joe wants to hold for a long period of time. Holding a commodity is seen as holding inventory and no one wants to hold inventory for very long, because there are costs attached to carrying that inventory. Apart from the cost of storage, the biggest cost of holding commodities is the risk of a fall in prices. Of course, there are chances of prices rising as well, but statistically, the chance of a rise in commodity prices tend to be more or less equal to the chances of a fall over a long period of time. Similarly, the holding of currencies brings with it more or less equal chances of a rise or fall in prices. This is unlike the case of assets (like houses, or factories, or gold or brand name), where the chances of a rise in prices are, in the long run, greater than the chances of a fall. There is, thus, prima facie, a disincentive for most people to hold onto commodities or currencies for very long periods of time, or in excess of their requirements, especially in the physical form. Of course, an entire industry thrives on the holding of commodities. But, this is usually in the form of futures or options. Here too, we find that the holding period for most futures or options tends to be rather short, especially in comparison with the holding period for even financial assets. The open interest in most Futures markets, for both commodities and currencies, tends to be concentrated in the first three months, with the first month having the highest open interest. People are, for the most part, interested in trading the commodity or the currency, buying and selling it for small profits in short periods of time. Few people tend to hold a commodity or currency futures for periods beyond three months. In fact, a few minutes to a few hours is the norm for the greater number of participants in the currency market. Clearly, therefore, gains in the currency market are in the nature of trading gains (which is a characteristic of commodities), rather than capital gains (which is a characteristic of assets).
  • 4. * See articles & notes in www.slideshare.net & www.scribd.com & www.slideshare.net Further, it is an oft-quoted fact that the global currency market is the biggest market in the world, with volumes approaching $3 trillion per day. The market for the G7, or Major, currencies is highly liquid and not amenable to “cornering” or “price rigging”. Individual participants in the market have no hope of influencing price. So much so that these days even Central Banks, especially of the G7 countries, have largely given up on the practice of Intervention. The global currency market is the closest that one can ever come to the utopian concept of Perfect Competition in a market, where there are a large number of participants, there is no barrier to entry or exit of participants and everybody shares instantaneous and complete information. In effect, the global currency market is a wholesale market, the biggest of them all. And, wholesale markets deal in commodities, not assets. We do not find Rembrandts, Picassos, Van Goghs, or Bikash Bhattacharjees being traded in wholesale markets. Maruti 800s, and even Honda Citys, are commodities, when compared to cars like Ferraris and Porsches, leave alone F1 cars. How does this help? Alright, suppose the debate is settled, or at least, it is personally settled for me (until someone with better logic unsettles me) that currencies are commodities, not assets, how does that help in generating better returns, or Alpha? Firstly, we realize that all “returns” in commodity (and currency) trading is Alpha because the commodity produces no returns on its own. Secondly, we can shun some of the techniques of investing in assets, such as “Buy and Hold”. Thirdly, we realize that while all returns in currency trading is Alpha, the Alpha, in turn, is generated from trading. Thus, we start looking for ways of trading better. We can draw inspiration from the fruit or vegetable seller, whether he be running a small shop, or he be a wholesaler. Both look to make a small margin on each sale and would rather let the stock go at cost than to see it go waste at the end of the day, resulting in a loss. He does not look to, on an average, make more per kilo or ounce sold, than is available in the market at the going price. Cut to the currency market ; If we act like the fruit seller, we will change our tactics. Instead of trying to figure out things like, “Is the Euro, or the Yen, going to go up or down”, we will try and spend more time working out how much profit per trade is generally possible to achieve. Having known that, we will try and increase the number of trades we do wherein we can get that average profit per trade we are looking for. This will also help us control our greed and we will not mind cutting losses fine and getting out of a trade at a meagre profit, or at cost, or at worst, a meagre loss. Disinvesting ourselves of the notion that we are investors will help us become better Currency Traders and thus help us generate Alpha. Did Deflation fears really help rally the oil markets ? Oil prices popped as the dollar index dropped hitting the lowest level since last April. The market seems convinced that the Euro zones problems are behind us so it appears that the carry commodity trade is back in play but could we see more problems up ahead? Of course while the dollar has been trending lower and the Euro higher is this a sign that we are headed for a bout of commodity price inflation or are the markets more worried about deflation?
  • 5. This kind of talk of course is bullish for commodities. As I have said from the first day that the Fed went to quantitative easing that the Fed just printed a floor under commodities. By creating inflation and money out of thin air the Fed changed not only the underlying value of a depreciated dollar but its entire price structure in regards to other commodities. If the Fed chooses they can create commodity price inflation and they hope some demand as they try to inspire economic activity by flooded the world with dollars. This is why oil prices remain stubbornly high despite a global glut of supply. Quantitative easing and essentially negative real interest rates has probably added a $10 to $25 a barrel premium to a barrel of oil. With the talk or more quantitative easing being too short commodities is a more dangerous proposition. At anytime they can run the printing press and change the fate of a commodity or at least its price. Of course there are dangers to this policy. If the printing of money cannot inspire banks to lend and stir economic activity and job creation then all that is left is commodity price inflation that may restrict the type of growth that is necessary to promote the type of economic activity to restore the economy back to a normal path. So what now should be apparent that at this stage of the recovery we now know that the Fed cannot do it on its own? The Fed has done what it had to do but now it now up to the lawmakers down in Washington. The next step that has to be taken is to make a plan to bring out of control spending under control and to cut corporate tax rates to restore confidence. Expect volatility and fear to continue in the face off policy imbroglios in most major currency capitals……….. shamikbhose@yahoo.com or shamikbhose@rediffmail.com * See Profile on facebook.com & linkedin.com