The Hindu Business Line : Commodity volatility led by risk aversion: StanChart

Amit Juneja of Standard Chartered believes that risk aversion and fund unwinding lead to volatility in commodities. In his view, copper is seen at $6,100 per tonne and the range is seen at $5,800-6,500 a tonne.

According to him, nickel prices were driven by Chinese stainless steel demand. Mr Juneja would prefer bet on gold for now. He feels that gold will cross $700 levels. He expects average crude price at $55 per barrel for the second quarter.

Excerpts from CNBC-TV18's exclusive interview with Mr Amit Juneja:

What problem led to the volatility - was it the yen carry trade unwinding, or the news from China that worried investors?

It was a combination of a number of factors - risk aversion was possibly one of the key ones. Funds were unwinding their positions as they exited positions in many other markets. I don't think we can draw a direct link with the yen carry trade, but it is possible that funding using yen carry trade could have been used for building up commodity positions.

Do you think it has stabilised - particularly the precious metals such as gold and silver after the fall last week?

It looks like it has stabilised. If you look at gold, the build up of speculative positions on Comex was extremely high.

The speculative long positions had doubled since October last year, once all the markets over reacted, this froth at the top got taken out. But it looks like the market is back to some form of stability now.

Is there a fear though of outflows because of that risk aversion that analysts are talking about? If that is the case, which metals - precious or base, are the most vulnerable according to you?

Base is the more volatile metal - that is because there is less liquidity in some of the base metals.

Gold has far greater liquidity and is traded all over the world.

Would you be able to set out any sort of trading range for some of these metals such as copper and aluminium?

Our forecast for copper is average; for the second quarter, it should possibly be at $6,100 and we are looking at a short-term trading range of $5,800-6,500. For gold, we are looking at $700 for the short-term. But the second quarter average that our research team has put together is $660.

What kind of risk aversion are you seeing in the region because that seems to be coming through from participants in pretty much every market - the equities, fixed income, commodities? What is leading to this sudden risk aversion over the last fortnight or so?

Markets were surprised by events.

There was a combination of events that happened at the same time. We are all aware of Mr Greenspan making his comments, the China market reacting - all of it happened at the same time. Once the set of events got rolling, markets just moved and when funds start pulling out, then the riskier positions obviously gets exited first.

What is your sense of how things will pan out in China because there, the authority seems to be making very strong sharp tightening noises again?

Looking at it purely from a commodities perspective, we have got to remember that China is still building up a lot of infrastructure for the Olympic Games. There is also strong demand for copper, which we forecast in the last call that I was here. We forecast after the Lunar New Year; the Chinese demand would build up and that is exactly what happened. This has actually provided a good base to copper and copper is back above $6,000. We expect that situation will not change for the short term. As far as nickel is concerned, stainless demand from China is very strong at the moment, which is leading to very high prices in nickel.

There has been the growing belief that the linkage between precious metals like gold and equity markets is getting stronger and stronger. Would you go with that, and in that case, in the very near term, which one would you bet on across all metals?

Gold has an anti-US dollar view. This means that if you take a view on the US dollar, you are effectively taking a view on gold at the moment. I would put my money behind gold for the short term because it looks like $700 and possibly higher is going to be seen pretty soon.

What is the call on crude, is it just a bear market rally out there, which is seeing unusual strength at 60 plus or do you think there is more to it?

$60 is supported in crude. But if you read the IEA report (International Energy Agency), they seem to indicate that the non-OPEC supply situation is drying up whereas they are forecasting higher demand for the current year and for the following year, that seems to play out a slightly supportive story for crude. That said, we expect that for Q2 of 2007, crude will average around $55.

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Commodity volatility led by risk aversion: StanChart