The much-anticipated UK referendum on staying in the EU has been done with and unexpectedly Britons have decided to leave the EU bloc, against market expectations. In the run-up to the referendum, commodities (except gold) and equities gained momentum on hopes that the ‘Remain’ camp would lead as indicated by polls.

The vote to ‘Leave’ has made financial markets jittery. The Dow Jones and S&P 500 index crashed down by more than 3 per cent, and Euro Stocks plunged by more than 8 per cent.

Commodities, too, faced heat with crude oil and copper falling by more than 6 per cent and 4 per cent (intra-day). The only exception was gold, the haven asset, which rose by a whopping 8 per cent (intra-day) while silver rose by around 3.5 per cent. Currency markets also took a hit with an intra-day fall of around 4.5 per cent and 12 per cent in the Euro and the GBP respectively vis-à-vis dollar.

Brexit has led to fears of the disintegration the bloc as a whole. The question is whether this is a good time to be in commodities as an asset class, from a diversification perspective, given the fragile global economy, with the divergent policies of the central bank and the slow economic recovery.

Monetary policies across the globe are divergent, with the US looking to raise interest rates, while, the UK, Euro-zone and Japan are still looking to prop up their respective economies.

Expect gradual rate hikes

The answer to this question is yes, because EU disintegration is just a thought as market conditions do not warrant a tight monetary policy, so one can expect gradual rate hikes from the US this year as a much-needed respite to the battered markets.

The fundamentals have their own role to play in deciding the price trajectory of a commodity. For gold, the investment demand has risen with an inflow of 26.43 tonnes to 934.33 tonnes in the past week while crude oil inventories in the US have seen signs of a drawdown for four consecutive weeks. In the base metals space, the slowdown in China and rising inventories at LME warehouses are factors that need a close watch.

Now that the Brexit decision has been made, the focus of investors will shift to the upcoming meeting of the US Federal Reserve, scheduled for July 26-27, for clues on the rate hike, if any. If not, gold as an asset class will be a favoured investment destination while industrial commodities will also gain momentum.

From a month perspective, we expect gold to be a favoured asset for investors in these uncertain times and gold prices (CMP: $1,326/oz) can move higher, towards $1,400. On the MCX (CMP: ₹31,579/10 gm) prices can move up, towards ₹33,000.

The writer is Associate Director, Commodities & Currencies Business, Equity Research & Advisory, Angel Broking. Views are personal.

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