By Sheeba Gupta
MUMBAI (Commodity Online): There are debates whether trading in commodities are better than trading in stocks. Though this debate will continue for ever, logically the tilt has always been towards commodities as W.D. Gann said in his book “How to Make Profits in Commodities”.

The book published in 1942 gave a lot of insights into the basics of getting things right for commodities. He categorically stated commodity trading is not gambling as some people believe in. It still remains the best price discovery mechanism for farmers but pity that very few governments use this to give better price to farmers.

Very few people follow the golden rule to protect the capital first, make profits after this. Fewer have any knowledge of the commodities they get into trading. The very fact that big traders trade without any principles and try to manipulate markets puts the entire sector into jeopardy.

Since many of these traders, mostly intraday, consider commodities just like the stock market, they fail to infuse the enthusiasm and the long term commitment necessary for commodity trading. Gann has given some examples of why commodities are better than stocks.

The basic tenets of commodities are the underlying assets. What you get in stocks is a piece of paper and if the company gets dissolved like Lehmann Brothers, then your paper value will not be more than a toilet paper. In turn commodities are forever because they are consumed as much as they are planted, harvested and produced each year.

This creates demand and supply which is the basic logic for any economic activity. And since commodity figures are in public domain, it cannot be manipulated. For example, if a commodity-growing region faces drought, then expect lower supply for that particular commodity. You don’t need rocket science to know this. But in stocks, companies can fudge accounts as in the case of Satyam Computers and Enron and show fantastic results resulting in higher stock prices on the exchange.

The promoters and their relatives can then offload their stocks at higher prices and when the news breaks or when the next quarter results are announced discounting the previous losses or profits, the stock prices comes down. This is the time they buy back their stocks.

The retail investors have no knowledge about this insider trading activity and end up as losers. Commodities cannot be manipulated this way. They follow a seasonal trend and coupled with weather and previous data, the supply and demand can be easily forecast.

General belief is that commodities are much hard to analyse. This is a myth. Stocks are difficult rather. How many stocks can you analyze since there are thousands of companies listed on an exchange and it is difficult to get to know which companies you should invest. Moreover the number of charts, the datas that gets generated in stock charts are much more complicated than in commodities.

You will hardly find commodities going against the demand supply trend whereas it is common in stocks. When petroleum prices were going sky high, stock price of Reliance Petroleum should also have followed and once crude came down, the same trend should have followed, in logical terms. But this did not happen. So those who apply logic are bamboozled.

Moreover declaring dividends has become a common practice to jack up prices. And this can be done within no time. No body will ask on what basis this dividend is paid. This is completely done away in commodities.

As far as speculation is concerned, it is a sin in stock market whereas it is a boon in commodities. Stocks tend to fluctuate on rumours and these rumours can be from the speculators who want stock prices to either fall or rise. Once this activity happens, a correction becomes almost impossible. While in commodities speculation is legitimate and even if the rumours turns out to be false, the demand and supply logic will take care of the price corrections.

The most important part is that the commodity demand is real whereas the stock demand is artificial. Real people at real time consume commodties and this gives a chance to forecast tops and bottoms of commodities with greater accuracy.

Stocks cannot be consumed. Many of you may be having share certificate of companies that no longer exists. If you had commodities instead, you could have stored and consumed it.

Those who trade in commodities with conviction and ethics will vouch for it. What is your take on commodity trading? Have you ever tried? Please let us know your take by mailing your experience to news@commodityonline.com

Extracted from Commodity Learning Series by www.commodityonline.com

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