Commodity Trading v4

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    Who is Jim Rogers?

    James Beeland Rogers, Jr.

    Renowned American Investor

    Living in Singapore since 2009

    Chairman of Rogers Holdings and

    Beeland Interests

    Co-founder of Quantum Fund with

    George Soros

    Creator of Rogers International

    Commodities Index (RICI)

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    A commodity is a good for which there is a demand,

    but is supplied without qualitative differentiationacross a market.

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    Commodities

    LEAD

    SUGAR

    GOLD

    NATURAL GAS

    COFFEE

    OIL

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    WhyCommodities?

    Central issue is the law of supply and demand

    An increase in demand results in price increase

    Supply shortage takes long time to fill up

    Long bull runs

    Stocks are more volatile than commodities

    Average commodities return comparable to S&P 500

    Price of commodities can never fall to zero

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    How are Commodities Traded?

    Individual Account

    Managed Account

    Trading futures options

    Commodity pool

    Mutual funds

    Index investing (Recommended)

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    Oil

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    Background of Oil

    Unique features of Oil Industry

    Organisation of Petroleum ExportingCountries (OPEC) influencesupply and prices through member nation quota system

    Subject to supply disruptions due to political instabilities

    Prices affected by either real or perceived possibility of disruptions

    Oil transactions settled in USD

    Uses of oil

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    Top 5 Oil Consumers

    Country Consumption

    (Thousand

    barrels per

    day)

    Percentage of

    Global Oil

    Consumption

    United States 18,810

    China 8,324

    Japan 4,443

    India 3,110

    Russia 2,740

    Source: US Energy Information Administration, 2009

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    Top 5 Oil Producers

    Country Production

    (Thousand

    barrels per

    day)

    Percentage of

    Global Oil

    Production

    Russia 9,934

    Saudi Arabia 9,760

    United States 9,141

    Iran 4,177

    Ch

    ina 3,996

    Source: US Energy Information Administration, 2009

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    Rogers View

    Supply will decrease

    No new major oilfield found for 35 years

    OPEC suspected of inflating oil reserves

    Hubberts Peak may be reaching soon, or has already been reached

    Efforts to find alternative sources of oil has been relatively

    unsuccessful

    Demand will increase Emerging Asia is expected to double its oil demand

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    Time Series Analysis of Oil

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    100

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    Demand

    /Supply(Millionbarrels/day)

    Year

    Demand

    Supply

    Value (USD)

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    Critique

    External factors: political reasons play a huge role on the prices of

    oil WHY?

    Data on political effects of Iraq Wars, Middle East crisis, Japan

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    Possible Uncertainties

    Growing environmental concerns

    World is looking towards renewable and sustainable sources of energy

    Greater research on alternative sources of energy

    If successful, demand of oil will be vastly affected

    Political complexities

    Japanese nuclear situation might fuel greater need for fossil fuels in the

    long run Middle Eastern political unrest might continue damaging oil reserves

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    Natural Gas

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    Gold

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    Background of Gold

    Increasing stockpile

    Does not get consumed/destroyed

    Convert to bullion with minimal loss in value

    Ancients valued gold for

    Rarity

    Durability

    Ornamental appeal

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    Rogers View

    Price driven up by Goldbugs

    Pessimistic investors that believe gold will have value at the end of

    days

    Motivated by fear of inflation, weakening Dollar and political instability

    Not motivated by supply and demand

    Easily oversupplied

    No gold is consumed/destroyed

    Almost half of existing metal exploration is for gold

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    Rogers View

    Net decreasing demand

    New technology to replace gold in dentistry

    New use in electronic industry

    Decreasing usage of gold in jewelry

    Other metals more profitable

    Supply allowed to dwindle

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    Demand of Gold

    0

    200

    400

    600

    800

    1000

    1200

    1400

    -400

    100

    600

    1100

    1600

    2100

    2600

    3100

    3600

    4100

    4600

    2004 2005 2006 2007 2008 2009 2010

    USdollarperounce

    Tons

    OTC Market

    Industry

    ETF & other similar

    Bar&Coin

    Jewelry

    Gold Price $/oz

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    Critique

    Goldbug Demand

    Gold has -0.65 correlation with Dollar

    Uncertainty in market causes value of Dollar to drop and results in

    increase demand for Gold

    Gold has 0.08 correlation with Inflation

    Low correlation can be used to protect against inflation

    Global financial instability

    Default of sovereign debts

    Middle East unrest

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    Critique

    Goldbug infiltrate central banks

    Net buyer of gold for first time in 21 years (since 1989)

    Growth of Asian Wealth

    Indias gold jewelry demand increased 69%

    Chinas gold jewelry demand increased 13% and

    investment demand increased 70%

    Result: Demand > supply Record level price of $1432.57

    Gold performance far exceeded Jim Rogers expectation

    Goldbugs might be here to stay due to the global

    instability

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    Possible Uncertainties

    Future state ofUSA economy

    Largest debt the world has ever seen

    If not handled properly will lead to long term damage to the economy

    Shifting of financial power to Asia

    Possibility of keeping reserves in Yuan

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    Limitations ofCritique

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    Coffee

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    Background ofCoffee

    Ethopia said to first discover coffee and its energizing effects

    First evidence of it being used for drinking in Yemen

    First roasted and brewed in Arabia

    First kopitiam: 1645, Venice, Italy

    Second most traded commodity after oil

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    International Coffee Agreement

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    Rogers View

    Decrease in supply

    Bad weather

    Increase in demand

    Long cultivation period

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    Data/Charts

    0

    20000

    40000

    60000

    80000

    100000

    120000

    140000

    160000

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    Production ('000 bags)

    Consumption

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    Data/Charts

    0

    20

    40

    60

    80

    100

    120

    140

    160

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    Prices (cents per ounce)

    Prices (cents per ounce)

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    Critique

    Less coffee growers

    Unfavorable conditions

    Global warming

    Increased consumption

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    Possible Uncertainties

    Weather

    Demand

    Exchange rates

    Technology

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    Limitations ofCritique

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    Sugar

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    Rogers View

    Price of sugar will increase

    Demand > Supply Sugar can be converted to ethanol, which is used to mix gasoline

    High oil prices will divert more sugar to produce ethanol and hence

    decrease the supply of raw sugar

    Chinas recent move to import sugar instead of remaining self-

    sufficient

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    Background of Sugar

    Sugar

    Sugarcane

    75%

    Localconsumption

    75-80%%

    Free market

    20-25%

    Sugar Beets

    25%

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    Price of Sugar

    0.00

    5.00

    10.00

    15.00

    20.00

    25.00

    30.00

    2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    cents/pound

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    Sugar Producers

    Producers Amount of sugar (in millions of tons)

    Brazil 30

    European Union 22

    India 20

    China 10

    United States 7

    Mexico 6

    South African Development

    Community

    5.7

    Australia 5.4

    Thailand 5

    Russia 2.7

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    Critique

    World sugar production for 2010/11 is forecast at 164 million (up

    12 million)

    Consumption is forecast at a record 158 million

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    Demand Side Factors

    Using simple demand and supply analysis, we can predict that the

    high prices of sugar will cause the demand of sugar to fall

    Demand for sugar is also dependent on oil prices

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    Supply Side Factors

    Farmers try to take advantage of the previously high sugar prices

    China, Brazil, Thailand and Russia farmers might be able to close thegap between demand and supply

    Real problem for the sugar market the lack of real investment

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    Limitations ofCritique

    Assumption that weather conditions are normal for agriculture of

    sugarcane and sugar beets

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    Lead

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    Background of Lead

    Malleable, dense and corrosion-resistant

    Poisonous

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    Usage of Lead

    Mainly in electrical cable covers and solders

    Starting-lighting-ignition (SLI) lead-acid storage batteries (88% of

    the worlds lead)

    Lead additives were put into gasoline for better engine

    performance

    Special electrical power systems for hospitals that are not subject

    interruption

    Prevent the emission ofharmful radiation from television

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    Rogers View

    0

    500

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    1500

    2000

    2500

    3000

    3500

    4000

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    Critique Supply Side Factors

    The production in the US has been down for 8 years

    Lead production from mines worldwide was down as well

    In summary, lead supplies are down worldwide.

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    Lead Supply

    0

    200,000

    400,000

    600,000

    800,000

    1,000,000

    1,200,000

    1,400,000

    1,600,000

    2000 2001 2002 2003 2004 2005 2006 2007 2008

    Australia

    Canada

    China

    Mexico

    Peru

    US

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    Critique Demand Side Factors

    Increasing demand for cars

    China is a dominant factor

    TV and computer monitors

    Lead is used to block radiation

    In summary, there is an increasing demand for lead

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    Production ofCars

    50000000

    55000000

    60000000

    65000000

    70000000

    75000000

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

    Car Production

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    Possible Uncertainties

    China

    Giant consumer for metals Major player in supplier

    Closure of inefficient factories

    Research in potential substitutes

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    Limitations ofCritique

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    THE END.

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    References

    http://gulfnews.com/mobile/business/oil-gas/libyan-unrest-likely-to-

    leave-deep-scars-on-oil-sector-1.766369

    http://www.eco-action.org/dt/oilfut.html

    http://www.

    h

    ubbertpeak.com/h

    ubbert/wwf1976/

    World Oil Demand and its Effect on Oil Prices, CRS Report for Congress

    (2005)