AI HW 1

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Fordham University *

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Economics

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Feb 20, 2024

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1. What is the outlook for precious metals, energy and agricultural products? Cite your source. According to a report published by Heraeus, the outlook for precious metals in 2024 is very promising due to the growing confidence from the Federal Bank of not increasing the interest rates. This dovish outlook is to aid the process of a soft landing to cut down inflation and also to hedge against the fears of a possible recession. Gold is expected to set record highs of an estimated value of $2,250 in mid 2024. Silver is also expected to follow the footsteps of gold and is estimated to have a high of $29 per ounce. As the US dollar will weaken in the global market (due to cuts in the interest rates), precious metals will be cheaper, resulting in high demand and, therefore, higher prices. Other precious metals like Palladium is expected to drop even further to a range of $700 to $1,200 as the demand for palladium is likely to go down because the growth in car production is expected to slow down in 2024. Furthermore, the outlook for the energy sector also remains positive. According to a report by Fidelity, oil prices are likely to increase due to a constrained supply, ongoing geopolitical risks, and a growing global demand. OPEC as a group has agreed to keep the supply of oil tight to maintain the cost of oil per barrel between $80-$100. Furthermore, the two ongoing wars will increase the risk of energy supply disruptions that will cause the price of oil to increase. Lastly, if we analyze the expected future performance of agricultural products, it is likely to be up. According to a report by Nasdaq, wheat is expected to rise in price as there is a tight supply (drawdown of 10 million metric tons). Corn prices will relatively remain stable as any decline will prompt Chinese investors to buy it back and draw the price back up. Moreover, soybeans are expected to be traded at somewhat the same prices as of 2023. Even if prices rise, Argentina will export soybean (as a surplus) due to the inherent demand pull aspect. Sources: https://www.heraeus.com/en/hpm/company/hpm_news/2023_hpm_news/ heraeus_precious_metals_forecast_2024.html https://www.fidelity.com/learning-center/trading-investing/outlook-energy https://www.nasdaq.com/articles/agricultural-commodities-outlook-2024 2. What is the size of the precious metals, energy and agriculture commodity markets? According to a report by Statista, the overall notional market value of the commodity market based upon commodity derivatives in 2023 was $128 trillion. Out of this, $25.4 trillion was precious metals, $39.95 was energy products and $29.96 trillion was agriculture products. https://www.statista.com/outlook/fmo/commodities/worldwide#value-development 3. Who are the major plays/producers of precious metals, energy and agricultural commodities? One of the largest players in the precious metals market is Anglo American that produces 37% of the world’s platinum and operates in 15 countries with the help of 56 sites. Their main products include copper, nickel, platinum group metals and diamonds. Their 2023 mid-year financials indicate that the company generated a revenue of $15.674 billion in the first half of 2023. Another large producer of precious metals is Barrick Gold Corporation which has a presence in 13 countries. Its revenue for mid-year 2023 was $2.83 billion. Barrick Gold Corporation’s mines produce gold, silver, and copper commodities.

Moving on, ExxonMobil is a dominant producer of energy products having a market cap of $412 billion. With an aim to heavily invest in renewable energy products, Exxon made $398 billion in 2022. They are involved in the upstream, downstream and refinement of energy products like oil and coal. Lastly, one the largest producers of agricultural products is a private company named Cargill Inc. which had a revenue of $165 billion in 2022. With operations set in 65 countries, they focus on the production of grains, palm oil, livestock feed, starch, and other agricultural commodities. https://finance.yahoo.com/news/17-biggest-energy-companies-us-153102714.html https://finance.yahoo.com/news/15-biggest-agricultural-companies-us-205552537.html https://www.angloamerican.com/about-us/at-a-glance#:~:text=About%20Anglo%20American,- Anglo%20American%20is&text=As%20a%20responsible%20producer%20of,across%20our %20operations%20by%202040 . 4.Where do spot precious metals, energy and agricultural commodities trade? Give one example for each. Spot precious metals, such as gold and silver, can be traded on the Commodity Exchange Inc. (COMEX). For instance, through COMEX, buyers and sellers can buy and sell commodities through future contracts by locking the spot price for a future acquisition date. Spot energy products can be traded by purchasing or selling ETFs. For instance, energy commodities can be pooled together in a basket and be traded as an ETF (such as the BNO), where the change in spot price is mirrored by the change in BNOs net asset value. Lastly, spot agricultural commodities can be traded over the counter (OTC). This means that buying and selling are not regulated and the prices are privately negotiated. Moreover, it could be traded through an instrument known as the ETN where investors purchase a debt security with cash flows that are directly linked to the value of the portfolio. 5. What were some of the best performing commodities in 2023? 2023 turned out to be a horrendous year for commodities as the SPGSCI fell -4.7% while the S&P 500 grew around 20%. However, some commodities did perform better than other commodities. One of the best performing commodities in 2023 was gold which gained around 13% in its value. Furthermore, cocoa was up 72% and iron ore rose 55% as China looks to shore up its property sector. Rice was also among the top performers and had returns of 43.4% in 2023. https://www.reuters.com/markets/commodities/strong-gains-cocoa-iron-ore-2023-energy-prices- dip-2023-12-29/ 6. What were some of the worst performing commodities in 2023? Some of the worst performing commodities in 2023 include aluminum, natural gas, zinc, palladium, and coal. Aluminum’s returns during 2023 were -24.79%. Natural gas, due to Russia being the world’s largest natural gas exporter, had returns of -24.99% in 2023. Zinc had a 2023 return of -33.64%, and palladium had returns of -35.41%. Lastly, coal had a 2023 return of - 51.99% due to price fluctuations that resulted from the need to find alternative sources to Russian fuel. https://finance.yahoo.com/news/10-worst-performing-commodities-2023-123034769.html 7. Go to the CME website. What information and resources does the website provide?

The CME Group is the global leading derivatives marketplace. The CME is made up of four exchanges: CME, CBOT, NYMEX, and COMEX. On the website, the CME provides information on the highly liquid futures, options, OTC, and cash markets, along with available trading access and vital statistics including the average daily volume of each commodity traded and the average daily notional value. Additionally, the CME website provides industry leading data solutions that users can utilize to help with their individual trading decisions and risk management. Along with data, the CME website provides technology services and analytical tools to help ensure high-performing trades with different levels of risk. https://www.cmegroup.com/company/cme.html 8. List the major categories of futures contracts traded on the CME. Currently, the major categories of futures contracts traded on the CME include agriculture, foreign exchange, equities, weather, cryptocurrencies, real estate, and interest rates. https://www.cmegroup.com/company/designated-contract-market.html 9. What is the futures price of one gold contract, one oil contract and one soybean contract? Be sure to include the units that the contract price is based upon e.g., barrels, bars, bushels etc. The futures price of one gold contract as of January 30, 2024, is $2050.9. The contract unit is 100 troy ounces and the contract price is based on U.S. dollars and cents per troy ounce. The futures price of one crude oil contract as of January 30, 2024 is $77.85. The contract unit is 1,000 barrels and the contract price is based on U.S. dollars and cents per barrel. The futures price of one soybean contract as of January 30, 2024 is 1,217.6 USc. The contract unit is 5,000 bushels (~136 metric tons), and the contract price is based on U.S. cents per bushel. https://www.cmegroup.com/markets/metals/precious/gold.html https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.html https://www.cmegroup.com/markets/agriculture/oilseeds/soybean.html 10. What is the notional value of one gold, oil and soybean contract based on the price per unit and the number of units in one contract? The notional value of one gold contract based on the price per unit and the number of units in one contract (100 troy ounces) is $205,090. The notional value of one oil contract based on the price per unit and the number of units in one contract (1,000 barrels) is $77,850. The notional value of one soybean contract based on the price per unit and the number of units in one contract (5,000 bushels) is 6,088,000 USc. 11. How much margin is required to buy or sell one gold, oil or soybean contract and what is the contract's embedded leverage? - Gold margin requirement for futures contracts is 4-6% of contract value which translates to leverage of 16x to 25x - Oil margin requirement for futures contracts is 3-5% of contract value which translates to leverage of 20x to 33x - Soybean margin requirements for futures contracts is 5-7% which translates to leverage of 14x to 20x

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12. Pick one ETF or mutual fund based on a specific or a basket of commodities that you would want to buy for the next 12 months. Give a few reasons why you think the commodity will rise in value and why you choose the particular fund. - United States OiIFund (USO): Oil prices are set to rise in 2024. OPEC oil producers pledged to cut output totalling 2.2 million barrels per day for Q1 2024. Goldman predicts OPEC group to maintain Brent oil prices of $80-$100 for 2024. 13. Pick one public company that produces a specific or group of commodities that you would want to buy for the next 12 months. Give a few reasons why you think the share price will rise in value and why you choose the particular company. - Wheaton Precious Metals (WPM): Operates 20 mines and 12 development projects throughout the americas. Q4 they generated revenues of $236.1 million. Analysts rate it as a strong buy. 28 hedge funds are long the stock, including First Eagle Management. Wheaton is a popular commodities investment among others such as GOLD or CVX. 14. Pick one private limited partnership that invests in commodities that you would want to buy for the next 12 months. Give a few reasons why you think the fund is attractive? - NuStar Energy: With oil prices expected to rise NuStar will likely see an increase in revenue. NuStar has 63 storage facilities that store and distribute crude oil, refined products, and renewable fuels across the USA and Mexico. The company has grown from $400 million in assets to $5 billion in 20 years. 15. If you were constructing a portfolio of traditional and alternative investments, would you include an allocation to commodities as part of your asset allocation? Are there any situations where you would want to go short a commodity, ETF or public traded company?Explain your reasons. - No. After completing the last work project we concluded that a portfolio with 60% equity and 40% government bonds would be the best portfolio. Over the past 10 years commodities have performed poorly compared to the S&P 500. I would short an ETF, commodity, or public company to hedge against exposure.

AI HW 1

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