William Gamble
Commodities markets, ETFs and emerging economies

Global commodity assets under management have increased to about $235 billion by late 2009 compared with a mere $6 billion-$10 billion in 2000

Diversification is one of the main tenets of safe investing.

Since different asset classes are not supposed to correspond, diversifying your portfolio should allow you to hedge against losses in one category or profit from another.

According to two American finance professors, commodities over the period between 1959-2004 were not correlated with the stock market.

Commodities did well when stocks did not and commodities did poorly when stock markets were rising. Of course, during the recent market collapse, diversification didn’t help, because all asset classes including commodities and stock markets collapsed together. What happened? Two things: exchange traded funds (ETFs) and emerging markets.

Commodities markets all have a central problem, inflexibility of supply. In rising stock markets when demand is high, companies do not seem to have problems fulfilling the demand by issuing debt or stock. Governments can issue mountains of debt and investment banks can issue derivatives with a few key strokes.

This is not true of commodities. It can take years to drill a new well, develop a new mine or plant new fields. So with supply being inelastic, even small changes in demand can send the price soaring and detach it from underlying economic projections.

One of the most recent changes to the commodities markets has been ETFs. ETFs solve some major problems with commodities investing. Before ETFs you had two choices: options and commodities companies like an oil or mining company.

Each had problems. ETFs are not perfect, but they do offer good solutions to these problems. So the money flowed in. Global commodity assets under management increased to about $235 billion by late 2009 compared with a mere $6 billion-$10 billion in 2000.

Commodities markets used to be the province of a few professional players. These included commodities producers and consumers trying to hedge and a few sophisticated speculators. Now it is a huge casino made up of every type of investor.

The ETFs went from tracking the market to being the market. Gold ETFs own more of the metal than China. Two ETFs have accumulated more than 100,000 ounces each of platinum and palladium.

In a market of only about 6 million ounces, a 100,000-ounce swing is big enough to result in large price swings. So speculative frenzies driven by cognitive biases can easily overwhelm economic realities.

The other change in the commodities sector has been emerging markets. It is not news that many of the major commodities producers have been emerging markets. Now many of the commodities consumers are also emerging markets. In time, commodities markets could probably adjust to this change in supply and demand except for one thing. Both sides are heavily dominated by State-owned companies. {break}

State-owned companies are creatures of the state. Regardless of the country, they all function for political reasons, not for profit. They are not, nor do they have to be, transparent. They are usually powerful enough to write their own laws. The result is a lack of timely, complete, or accurate information. Often there is simply no information at all and they can change the rules at any time.

China represents a particularly good example. Buying by Sinopec and PetroChina, and China National Petroleum Corp, massive consumers, most likely caused the oil price spike in the spring of 2008.

Massive stockpiling of copper by Chinese companies pushed up the price of copper in 2009.

ExxonMobil is the largest private oil company in the world, but it only ranks 14th among global oil companies. The rest of the producers, many of which are also consumers, are State-owned. Chile’s State-owned copper company might be required to sell more to pay for earthquake reconstruction.

So not only are commodities markets being changed by ETFs and emerging countries, now there is the combination of the two, which could potentially lead to some real trouble.

Often, emerging market countries have sovereign wealth funds (SWFs). Like many other investors, they have come to realise that ETFs are a good and cheap way to invest and diversify.

For example, China's SWF, China Investment Corporation (CIC), is the fourth-largest investor in the US Oil ETF and it recently also took a 0.4% stake in the SPDR Gold Trust, the largest physically backed ETF.

CIC is worth an estimated $300 billion and its mere size could distort the markets, but that is not the only problem. It is the connections between the government as an investor and the government as a consumer and producer. Through their control of large businesses, governments could and do create bubbles that would also be very profitable for their investments in ETFs.

The general assumption of most investors is that commodities and the ETFs, which are supposed to represent them, move according to general economic trends.

Both the reality and information about the real reason for price movements in this asset class could be quite different. This does not mean that commodities are not a good investment.

Money can be made by taking advantage of the volatility. It does mean that assumptions about economics and safe diversification may simply be untrue.

(The writer, William Gamble, is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])


Study indicates farmers not keen on GM crops

The nationwide survey was conducted to help formulate a policy around biotechnological innovations in India, taking into account public perceptions and attitudes

In the backdrop of the controversy over the safety of use of Bt brinjal in the country, a study has claimed that most farmers do not favour genetically modified (GM) seeds for producing food crops while there is also a lack of information among consumers about their usage, reports PTI.

Around 4,000 farmers and 2,500 consumers nationwide were surveyed in the last three years in five States jointly by Gene Campaign, an NGO, and Hyderabad University, to study the general attitudes and perception of farmers and consumers towards GM seeds and foods. “Among farmers, about 40% said that they were willing to cultivate cash crops with modified seeds (often referred to as transgenic fertilisation) while 80% refused to use such seeds, that contain a poison to control pests, for producing food crops,” says the study.

It also noted that their attitude towards food was conservative and there was sacredness attached with it.

About 90% of farmers did not agree to take the risk to use technology that allows the use of chemicals to control all weeds effortlessly but also destroyed surrounding flora, as per the study.

The seed "modified" with animal or insect parts were viewed as "tempered," not normal and natural and different from regular seeds, said Suman Sahai of Gene Campaign, claiming that such perceptions was seen across all age groups and educational status.

However, the respondents, both farmers and consumers, trusted the government with respect to agriculture and food technologies rather than the media or NGOs—or for that matter, scientists—according to the study.

“The government must be humbled by the trust placed in it by the country's farmers and consumers with respect to agriculture and food technologies and this should propel them to safeguard public interest," said Ms Sahai, advocating further research in this area. She said that the government's biotechnology policy must take into account the societal contexts of technology adoption to strengthen the interest of the public who, according to the survey, have posed faith on the government for information and regulations.

"The overall goal of this first-ever study in the country is to contribute towards formulation of a meaningful and transparent public policy around biotechnological innovations in India, which takes into account public perceptions and attitudes," said E Haribabu, who is associated with the Hyderabad University.

Consumers were equally sceptical of GM foods mainly because of lack of information and the respondents felt they had no benefit from such items while private companies were the prime beneficiaries.

“Attempts to introduce foods into a situation where the majority of the population is not aware of the nature of GM foods or of their benefits and risks is not democratic or enlightened policy making,” said the study.


Hiring in public sector banks to intensify over the coming months

India's nationalised banks seem set for a major recruitment drive once again to meet growth needs and fresh vacancies that will arise when a large number of employees retire in the next three-four years

Public and private sector banks in India are expected to hire over 45,000-50,000 people this year alone as probationary officers (POs) as well as clerks. While Indian banks today employ over 7.25 lakh persons, the new recruitment drive is taking place due to three factors—staff needs arising out of growth and expansion, preparing for the large number of bank employees who are expected to retire in the coming three-four years and mitigating staff shortage caused by the belt-tightening over the past two years.

“Recruiting more people has now become a 'compulsion' for public sector banks (PSBs) as most of the employees working there had joined after 1970 and are near their retirement," CH Venkatachalam, general secretary, All India Bank Employees Association (AIBEA) and convener for the United Forum of Bank Unions (UFBU) told Moneylife. Another top union leader told us that a large number of employees will be retiring in the next three years.

Leading the recruitment in 2010 is the country's largest lender State Bank of India (SBI), which plans to hire around 4,500 officers and about 25,000 clerks, while its associate banks would hire another 1,700 officers. Bank of Baroda, the country's third largest State-run lender, is planning to recruit about 3,500 employees that would include around 1,800 to 2,000 officers.

"With most banks entering diversified business segments, they need to recruit people and train them properly, as there are many changes taking place in the banking domain. Earlier, banks used to recruit people as clerks without any proper training in banking. But now they will have to change their hiring process as required," Mr Venkatachalam said.

With a number of employees retiring over the next few years, there would be a dearth of knowledgeable people in the banking system. The freeze on recruitment in the past years has also caused PSBs to face a real drought in talent. This is true for junior level employees and also top management.

"Chairmen and managing directors of some PSBs are going to retire over the next few months. However, there still is no plan for their succession. The case is similar with senior management. Earlier, an assistant general manager would automatically become general manager when the post fell vacant. But this is no longer the case at most banks," the union leader said. The vacancies are not filled immediately and the workload is often redistributed among existing employees.

Besides regular bank jobs, banks are also planning to start a new chapter in banking services with the recruitment of business correspondents (BCs), mainly in rural areas. SBI alone is planning to hire 15,000 BCs during FY11. SBI’s plans are in tune with the Budget decision to provide banking facilities in all domiciles with more than 2,000 people.

However, unions are against the new banking model. "Using BCs as a front, private corporates and entities may enter PSBs and can misuse the banking system. Therefore, we are opposing the idea to hire BCs, as banks themselves can go to the last mile and provide banking services," Mr Venkatachalam said.

"Bank unions would protest the move and launch an agitation, if needed," the union leader added.




5 years ago

Recruitment has to be done like new generation Banks for the posts of Senior Managers,chief Managers etc,
AGM,GM to be directly offered to right candidates without exam but with oral interview.


7 years ago

The employees union mainly AIBEA opposed comuterisation tooth and sail and went on frequent strike.They paralysed the industry.Who suffered-only ordinary people.Business people used their connection with the ministres and got their jobs done.How many industrialists were put behind bars for looting the banks.They are given CDR mechanism to legalise the loot.Govt saw a golden opporunity in the situation.They allowed new generation pvt sector banks to loot the public after getting their share.Still they are planning to allow further banks to be set up in pvt sector.Let the unions ask for level playing field.All dirty jobs are for PSBs like pension accounts with Rs10/ min balance,no frill account with Rs5/ min balance,operate unviable rural brances and give small amount of crop loans to a large no of farmers and of course the cream of the business is for new gen pvt sector banks-they can fix what shd be the min balance,need not give pass book for SB accounts(forget RBI instruction-RBI in their pocket -directly or tho mininstry),engage muscle men for recovery.Let the unions stop the good customers migrating to pvt sector banks by giving best customer service.


7 years ago

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