MOSt COMMODITIES RESEARCH

ECONOMIC INDICATORS
Purpose: Trading Tool 12th December 2005

IMPORTANT ECONOMIC INDICATORS

Commodity markets around the globe are in a secular bull run. Be it NYMEX,
COMEX, NYBOT in US, or LME in UK, Dalian Commodity Exchange in China or for
that matter MCX and NCDEX in India, commodity markets are buzzing every where
and the commodity indices are making new highs. This trend is pretty much evident
in the figure below, showing the benchmark CRB-Reuters Commodity Index, tracked
by commodity investor’s world wide

Commodities like Bullion, Platinum, Palladium, Crude oil, Heating Oil, Sugar, Metals,
Chana, Urad, Corn, Soy Oil and host of other commodities are hitting multi year highs.
Leading this Bull Run is Crude oil where hedge funds have huge positions. Crude on
1/12/2001 was trading at 19$ is currently at $60 and have made an all time high of $70.
Crude oil Bull Run is in its 5th year and still it doesn’t seem to end. Traders all round the
world have got fascinated with Precious metals and energy products.

We at MOSt Commodities have tried to make sense of important economic indicators that
affect the prices of precious metals and energy products. In this report we have tried to
identify important economic indicators affecting the prices of Gold, Silver and Crude.

Tejas Parekh (TejasParekh@MotilalOswal.Com); Tel: +91 22 39825435 
Motilal Oswal Securities Ltd., Hoechst House, 4th Floor, Nariman Point, Mumbai 400 021 Fax: +91 22 22816161
 MOSt COMMODITIES RESEARCH
Consumer Sentiment Significance Moderate

Next Release: 23rd December 2005

The University of Michigan conducts a survey of consumer attitudes concerning both the
present situation as well as expectations regarding economic conditions. Five hundred
consumers are surveyed each month. A preliminary survey is usually reported about the
second Friday of the month while a more complete survey is reported two weeks later. The
level of consumer sentiment is directly related to the strength of consumer spending.

The pattern in consumer attitudes and spending is often the foremost influence on stock
and bond markets. Ideally, the economy walks that fine line between strong growth and
excessive (inflationary) growth. This balance was achieved through much of the nineties.
For this reason alone, investors enjoyed huge gains during the bull market of the 1990s.

Relation

Consumer spending accounts for more than two-thirds of the economy, so the markets are
always dying to know what consumers are up to and how they might behave in the near
future. The more confident consumers are about the economy and their own personal
finances, the more likely they are to spend. With this in mind, it's easy to see how this index
of consumer attitudes gives insight to the direction of the economy. Gold prices moves
downward when the consumer sentiment becomes positive. The negative the consumer
sentiment the better is for gold investors.

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 MOSt COMMODITIES RESEARCH
ISM Mfg Index Significance Moderate

Next Release: January 2006

The Institute for Supply Management surveys nearly 400 manufacturing firms on
employment, production, new orders, supplier deliveries, and inventories. A composite
diffusion index of national manufacturing conditions is constructed, where reading above
(below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import
orders, backlog orders and prices paid for raw and unfinished materials are also measured,
but these are not included in the overall index.

Investors need to keep their fingers on the pulse of the economy because it dictates how
various types of investments will perform. By tracking economic data like the ISM
manufacturing index, investors will know what the economic backdrop is for the various
markets. The ISM manufacturing data gives a detailed look at the manufacturing sector,
how busy it is and where things are headed. Since the manufacturing sector is a major
source of cyclical variability in the economy, this report has a big influence on the markets.
More than one of the ISM sub-indexes provides insight on commodity prices and clues
regarding the potential for developing inflation. The Federal Reserve keeps a close watch
on this report that helps it to determine the direction of interest rates when inflation signals
are flashing in these data.

Relation

Since it is an indication of how well the manufacturing sector is performing it is an important

indicator of the health of US economy. Gold has an indirect relationship with this data. If the
ISM numbers are high i.e. if it indicates growth in the manufacturing sector thus leading to
growth in US economy, gold prices will see a downward movement though this data won’t
lead to a downward free fall in gold prices. This data has to be seen in relation with other
strong economic indicators.

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 MOSt COMMODITIES RESEARCH
Challenger Job Cut Report Significance Moderate

Next Release: January 2006

A monthly report on the number of announced corporate layoffs. It is not adjusted for
seasonal variations. The report indicates trends in the labor market. These statistics on
layoffs help us gauge the strength of the job market. Fewer layoffs suggest more people
have jobs. Every job comes with an income, which gives a household spending power.
Spending greases the wheels of the economy and keeps it growing, so the stronger the job
market, and the healthier the economy. Federal Reserve chairman Alan Greenspan talks
about it all the time and watches for it constantly.

Relation

This data has got a direct relationship with gold. The higher the rate of Job cuts the better it
is for gold. As this shows that the Job market in US is good or bad. If there are more
number of layoffs in a country than the economy of that country is not performing well.
Since the economy is not performing well lot of investment class would not yield good
returns and thus the demand for gold as an investment would rise as it is viewed as a
hedge and a safe investment haven. But this data cannot be viewed in isolation it has to be
analyzed along with other important Job data like non-farm pay rolls, jobless claims and
employment situation.

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 MOSt COMMODITIES RESEARCH
EIA Petroleum Status Report Significance High

Data is released weekly (Reserves) & Monthly (Demand & Supply)

The Energy Information Administration (EIA) provides weekly information on petroleum

inventories in the U.S., whether produced here or abroad. The level of inventories helps
determine prices for petroleum products.

Petroleum product prices are determined by supply and demand - just like any other good
or service. During periods of strong economic growth, one would expect demand to be
robust. If inventories are low, this will lead to increases in crude oil prices or price increase
for a wide variety of petroleum products such as gasoline or heating oil. If inventories are
high and rising in a period of strong demand, prices may not need to increase at all, or as
much. During a period of sluggish economic activity, demand for crude oil may not be as
strong. If inventories are rising, this may push down oil prices. Crude oil is an important
commodity in the global market. Prices fluctuate depending on supply and demand
conditions in the world. Since oil is such an important part of the economy, it can also help
determine the direction of inflation. In the U.S. consumer prices have moderated whenever
oil prices have fallen, but have accelerated when oil prices have risen.

Relation

The EIA (Energy International Administration) provides information about the official US
energy statistics and also information about the global demand and supply scenario. EIA
comes out with weekly as well as monthly outlook about the petroleum sector. This report
has got a lot of bearing on the way prices of crude oil will move depending upon the figures
and the outlook about the industry. Crude oil traders keep a watch on this data. Gold has a
direct relationship with a hike in prices pf crude oil though it is not as strong as the Gold-
USD/EURO relationship. With inflationary pressures due to the oil price hike, gold becomes
an effective hedge against inflation.

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 MOSt COMMODITIES RESEARCH
Jobless Claims Significance Moderate - High

Data is released weekly

New unemployment claims are compiled weekly to show the number of individuals who
filed for unemployment insurance for the first time. An increasing (decreasing) trend
suggests a deteriorating (improving) labor market. Jobless claims are an easy way to
gauge the strength of the job market. The fewer people filing for unemployment benefits,
the more have jobs, and that tells investors a great deal about the economy. Nearly every
job comes with an income that gives a household spending power. Spending greases the
wheels of the economy and keeps it growing, so a stronger job market generates a
healthier economy. By tracking the number of jobless claims, investors can gain a sense of
how tight, or how loose, the job market is. Just remember, the lower the number of
unemployment claims, the stronger the job market, and vice versa.

Relation

This is one of the most important data to be released on a weekly basis. This data when
looked collectively on a weekly basis provides an important indication about the job market
in the US. We can get the sense of how tight or how loose the job market is. The higher the
number of jobless claims persistent over a period of time and also an increase in the
number of people filing claims weakens the dollar and this is a good sign for gold investors.

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 MOSt COMMODITIES RESEARCH
Employment Situation Significance High

Next Release: January 2006

The Employment Situation is a labour market indicator. The unemployment rate measures
the number of unemployed as a percentage of the labour force. Non-farm payroll
employment counts the number of paid employees working part-time or full-time in the
nation's business and government establishments. The average workweek reflects the
number of hours worked in the non-farm sector. Average hourly earnings reveal the basic
hourly rate for major industries as indicated in non-farm payrolls. If ever there was an
economic report that can move the markets, this is it!
The employment data gives the most comprehensive report on how many people are
looking for jobs, how many have them, what they're getting paid and how many hours they
are working. These numbers are the best way to gauge the current state and future
direction of the economy. They also provide insight on wage trends and wage inflation is
high on the list of enemies for the Federal Reserve. Fed Chairman Allan Greenspan (Out
going) talks about this data frequently and watches for inflation constantly. By tracking the
job data, investors can sense the degree of tightness in the job market. If wage inflation
threatens, it's a good bet that interest rates will rise; bond and stock prices will fall.

Relation

This data gives a full picture of the employment situation in the country. This data is an
aggregate of the all the employment data released in the month right from your non-farm
payrolls to rate of unemployment in the country. This data has a lot of significance on the
prices of gold i.e. the movement of gold. For e.g. if there is a rise in non farm pay rolls this
will show that the industry is employing more and more people. This will boost the
economy, which will lead to a stronger dollar and weaker gold prices.

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 MOSt COMMODITIES RESEARCH
International Trade Significance Very High

Next Release: December 9th 2005

The international trade balance measures the difference between imports and exports of
both tangible goods and services. Imports may act as a drag on domestic growth and they
may also increase competitive pressures on domestic producers. Exports boost domestic
production.
Changes in the level of imports and exports, along with the difference between the two (the
trade balance) are a valuable gauge of economic trends. Furthermore, the data can directly
impact all the financial markets, but especially foreign exchange value of the dollar. Imports
indicate demand for foreign goods and services here in the U.S. Exports show the demand
for U.S. goods in overseas countries. The dollar can be particularly sensitive to changes in
the chronic trade deficit run by the United States, since this trade imbalance creates
greater demand for foreign currencies. This report gives a breakdown of U.S. trade with
major countries as well, so it can be instructive for investors who are interested in
diversifying globally. For example, a trend of accelerating exports to a particular country
might signal economic strength and investment opportunities in that country.

Relation

This is one of the most important and highly sensitive economic data, which can change
the direction of the movement of gold prices in the markets. Allan Greenspan (Out going
Fed Chairman) is concerned about the burgeoning trade deficit and his statement on trade
deficit has on many occasions provided a fillip to gold prices. The higher the trade deficit
the better it is for gold.

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 MOSt COMMODITIES RESEARCH
Treasury International Capital Significance High

Next Release: December 15 2005

These Treasury data track the flows of financial instruments like treasury securities, agency
securities, corporate bonds, and corporate equities into and out of the United States. TIC
data have been issued for the past 30 years, but only recently, due to an enormous rise in
foreign participation in the markets, have they grabbed the attention of the international
financial markets. Strong inflows (demand for U.S. securities) are needed to keep
downward pressure on interest rates.

Relation

Strong inflows underpin the value of the dollar since foreigners purchase dollars in order to
buy securities. A strong dollar helps to maintain stability in all U.S. financial markets. Since
it is a known fact that gold and dollar is negatively correlated the more people busy US
securities the more dollar will appreciate and gold prices will fall. So higher the inflows the
better it is for USD.

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 MOSt COMMODITIES RESEARCH
Current Account Significance High

Next Release: December 20 2005

The current account measures the U.S. international trade balance in goods, services, and
unilateral transfers on a quarterly basis. It shows the level of exports, imports indicating
trends in foreign trade. U.S. trade with foreign countries hold important clues to economic
trends in US and abroad. The data can directly impact all the financial markets, but
especially the foreign exchange value of the dollar.

Relation

The dollar can be particularly sensitive to changes in the chronic trade deficit run by the
United States since this trade imbalance creates greater demand for foreign currencies. If
the country has a current account deficit than the value of the currency will fall.

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 MOSt COMMODITIES RESEARCH
GDP Significance Very High

Next Release: December 28 2005

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity
and encompasses every sector of the economy. Investors need to closely track the
economy because it usually dictates how investments will perform. By tracking economic
data like GDP, investors will know what the economic backdrop is for these markets and
their portfolios.

The GDP report not only paints an image of the overall economy, but also tells investors
about important trends within the big picture. GDP components like consumer spending,
business and residential investment, and price (inflation) indexes illuminate the economy's
undercurrents, which can translate to investment opportunities and guidance in managing a
portfolio.

Relation

This is the most important data amongst the economic data released by the US. The GDP
is the broadest measure of economic activity. This data has the power to change the trend
of gold single-handed.

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 MOSt COMMODITIES RESEARCH
Consumer Confidence Significance Moderate - High

Next Release: December 28 2005

The Conference Board compiles a survey of consumer attitudes on present economic

conditions and expectations of future conditions. Five thousand consumers across US are
surveyed each month. While the level of consumer confidence is associated with consumer
spending, the two don't move in tandem each and every month. The pattern in consumer
attitudes and spending is often the foremost influence on markets. For stocks, strong
economic growth translates to healthy corporate profits and higher stock prices. For bonds,
the focus is whether economic growth goes overboard and leads to inflation and hence
increases interest rates. Ideally, the economy walks that fine line between strong growth
and excessive (inflationary) growth.

Relation

Consumer spending accounts for more than two-thirds of the economy, so the markets are
always dying to know what consumers are up to and how they might behave in the near
future. The more confident consumers are about the economy and their own personal
finances, the more likely they are to spend. With this in mind, it's easy to see how this index
of consumer attitudes gives insight to the direction of the economy. Gold prices moves
downward when the consumer confidence increases. The lower the consumer confidence
the better is for gold investors

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 MOSt COMMODITIES RESEARCH
FOMC Meetings Significance Very High

Next Meeting: December 13 2005

The Federal Open Market Committee consists of the seven Governors of the Federal
Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a
year in order to determine the near-term direction of monetary policy. Changes in monetary
policy are announced immediately after FOMC meetings.

The interest rate set by the Fed serves as a benchmark for all other rates. A change in the
fed funds rate translates directly to all other interest rates from Treasury bonds to mortgage
loans. It also changes the dynamics of competition for investor dollars: when bonds yield
10 percent, they will attract more money away from stocks and other investments than
when they only yield 5 percent.

The level of interest rates affects the economy. Higher interest rates tend to slow economic
activity; lower interest rates stimulate economic activity. Either way, interest rates influence
the sales environment. In the consumer sector, few homes or cars will be purchased when
interest rates rise. Furthermore, interest rate costs are a significant factor for many
businesses, particularly for companies with high debt loads or who have to finance high
inventory levels. This interest cost has a direct impact on corporate profits. The bottom line
is that higher interest rates are bearish for the financial markets, while lower interest rates
are bullish.

Relation

Fed Reserve is the central bank of US. It decides on the monetary policy of US. Decisions
taken by the Federal Reserve has direct bearing on the prices of gold. For e.g. If the FOMC
increases the interest rates in US people will invest more in US backed securities thus
increasing the demand for USD and pushing up the prices and leading to downward
pressure on Gold. FOMC in its meetings also discusses about the sate of the economy and
the solutions to the problems in the economy. These comments can also change the
direction of prices of gold for e.g. Fed Chairman’s comments on US trade deficit in his
testimony to the House had sent Gold prices rallying upwards and touching its highs.

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 MOSt COMMODITIES RESEARCH
Retail Sales Significance Very High

Next Release: December 13 2005

Retail sales measure the total receipts at stores that sell durable and non-durable goods.
Consumer spending accounts for two-thirds of GDP and is therefore a key element in
economic growth. So when you know that your consumers are spending your economy is
in for good times.

The pattern in consumer spending is often the foremost influence on stock and bond
markets. For stocks, strong economic growth translates to healthy corporate profits and
higher stock prices. For bonds, the focus is whether economic growth goes overboard and
leads to inflation. But for Gold strong US economic growth means dooms day. Ideally, the
economy walks that fine line between strong growth and excessive (inflationary) growth.

Retail sales not only give you a sense of the big picture, but also the trends among different
types of retailers. Perhaps auto sales are especially strong or apparel sales are showing
exceptional weakness. These trends from the retail sales data can help us understand the
trend of the economy. Strong retails sales means good consumer spending and thus leads
to growth in the economy.

Relation

Retail sales numbers have got high and inverse correlation with Gold prices. The higher the
retail sales the better it is for US economy and gold prices fall as retail sales come good.
The more the consumer spends the more your economy will expand so Retail sales is
inversely related to Gold.

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 MOSt COMMODITIES RESEARCH
Consumer Price Index Significance Very High

Next Release: December 15 2005

The Consumer Price Index is a measure of the average price level of a fixed basket of
goods and services purchased by consumers. Monthly changes in the CPI represent the
rate of inflation.

The consumer price index is the most widely followed indicator of inflation in the United
States. An individual investor who understands the process of inflation and how inflation
influences the markets will no doubt benefit over those investors that do not understand the
consequences of inflation.

The relationship between inflation and interest rates is the key to understanding how data
such as the CPI influence the markets - and your investments

Inflation (along with default risk and opportunity cost) basically explains how interest rates
are set on everything from your mortgage and auto loans to Treasury bills, notes and
bonds. As the rate of inflation changes and as expectations on inflation change, the
markets adjust interest rates accordingly. The effect ripples across stocks, bonds,
commodities, and your portfolio, often in a dramatic fashion.

Relation

CPI has an inverse relationship with the dollar. This is because if the CPI increases it
indicates that the consumers are paying a higher price for the goods and services
purchased by them, which is bad for the economy and vice-versa. CPI has a direct
relationship with Gold as if CPI increases there are inflationary concerns and people tend
to invest in Gold.

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 MOSt COMMODITIES RESEARCH
Producer Price Index Significance Very High

Next Release: December 20 2005

The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of
capital and consumer goods paid by producers.

The PPI measures prices at the producer level - before they are passed along to
consumers. Since the producer price index measures prices of consumer goods and
capital equipment, a portion of the inflation at the producer level gets passed through to the
consumer price index (CPI). By tracking price pressures in the pipeline, investors can
anticipate inflationary consequences in coming months.

The relationship between inflation and interest rates is the key to understanding how data
such as the CPI influence the markets - and your investments.

Inflation (along with default risk and opportunity cost) basically explains how interest rates
are set on everything from your mortgage and auto loans to Treasury bills, notes and
bonds. As the rate of inflation changes and as expectations on inflation change, the
markets adjust interest rates accordingly. The effect ripples across stocks, bonds,
commodities, and your portfolio, often in a dramatic fashion.

Relation

PPI has an inverse relationship with the dollar. This is because if the PPI increases it
indicates that the producers are paying a higher price for the raw materials procured by
them which will in turn lead to consumers paying a higher price for goods and services,
which is bad for the economy and vice-versa. PPI has a direct relationship with Gold, if PPI
increases, it will lead to high CPI creating inflationary concerns and people will tend to
invest in Gold.

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 MOSt COMMODITIES RESEARCH
ISM Non Manufacturing Index Significance Moderate

Next Release: January 5 2006

The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United
States, including agriculture, mining, construction, transportation, communications,
wholesale trade and retail trade.

By tracking economic data like the ISM non-manufacturing survey's business activity index,
investors will know what the economic backdrop is for the various markets

The ISM manufacturing index has a long history - dating to the 1940s. This new report
(beginning in 1998) was originally not adjusted for seasonal variation, but the ISM has
since established seasonally adjusted figures for several of the ISM non-manufacturing
components (including the business activity index) since 2002. As a result, the ISM non-
manufacturing survey has garnered more attention and is almost as widely followed by
financial market participants as its manufacturing cousin.

Relation

The ISM Non- Manufacturing Index has a direct relationship with the dollar, as it shows
what the economic backdrop is for various markets in the country. Since it is an indication
of how well other sectors in the country are performing it is an important indicator of the
health of US economy. Gold has an indirect relationship with this data. If the ISM numbers
are high i.e. if it indicates growth in the manufacturing sector thus leading to growth in US
economy, gold prices will see a downward movement though this data won’t lead to a
downward free fall in gold prices.

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 MOSt COMMODITIES RESEARCH
Existing Home Sales Significance Low

Next Release: December 29 2005

Existing home sales tally the number of previously constructed homes, condominium and
co-ops in which a sale closed during the month. Existing homes (also known as home
resales) account for a larger share of the market than new homes and indicate housing
market trends

This provides a gauge of not only the demand for housing, but the economic momentum.
People have to be feeling pretty comfortable and confident in their own financial position to
buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through
the economy, and therefore across the markets and your investments. By tracking
economic data such as home resales, investors can gain specific investment ideas as well
as broad guidance for managing a portfolio.

Even though home resales don't always create new output, once the home is sold, it
generates revenues for the realtor. It brings a myriad of consumption opportunities for the
buyer.

Since the economic backdrop is the most pervasive influence on financial markets, home
resales have a direct bearing on stocks, bonds and commodities.

Relation

Existing Home Sales has a direct relation with the dollar. This indicates that the financial
position of the people is good enough to buy as house. This also shows a sound economic
environment supported by construction spending and consumer credit. The ripple effect will
further support consumer durables and other products leading to a strong economy. This
has a negative relationship with Gold.

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