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Index trading in commodities is the right way forward

During the last week, the MCX launched its second index for trading. Earlier, the MCX had launched futures on GOLDEX, which was an index created out of a portfolio of gold and silver. Now, METLDEX has been launched as an index on base metals. What is this metal index and how can it make a difference?

5 Mins Read   |   26-Oct-2020   |  
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Written By Bani Thakkar

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Enter METLDEX into the fray

The necessity to trade in commodity indices was felt after the freak case of April 20 when the benchmark WTI crude closed in the negative due to shortage of delivery storage. Since the MCX crude oil contracts are benchmarked to WTI Crude, the MCX settled the trade with negative prices resulting in additional losses for long crude oil traders. At that time, MCX had underlined the urgent need to launch indices that would be safer, more stable and less vulnerable to such price fluctuations. 

The METLDEX is a weighted portfolio of key base metals like zinc, aluminum, nickel and copper. With a single position in futures of METLDEX, traders can get exposure to a complete portfolio of base metals. The advantage is that since it is a portfolio of base metals, any abrupt movements in the price of any single metal will not have an adverse impact on index traders. We have seen that even in equities Nifty trading tends to be less risky compared to single stocks. That is the argument that could make METLDEX popular among traders. 

Trade and protect too

Index futures on the METLDEX could have a variety of applications. Traders with large long / short positions in the underlying base metals can now hedge their risk using the METLDEX futures. In addition, producers of these metals and the consumers of these metals can also hedge their risks using the METLDEX as a potent risk management tool. Then there is the case of stocking agents who hold huge inventories of such base metals and they can also use the METLDEX as a means of either hedging their price risk or even look to do an index arbitrage over time to lock in assured returns on their metal holdings. That can be a good way of monetizing their idle metal inventories profitably. In short, the choices are humongous. Of course the traders can always use the index to take a punt on price direction. 

Time to look at next steps

SEBI has permitted institutions into the commodity space but the response has not been too enthusiastic. One way to get institutions interested is to catalyze the launch of metal linked ETFs that can be indexed to the METLDEX. Such index based ETFs on metals and different asset classes are extremely popular in other countries and would interest the investors in India too. MCX has bitten the bullet by launching two commodity indices. It is now time to leverage it to its full potential. That is the key!