‘Uncertainty over Europe crisis, US growth dragging commodities'

The risk appetite for commodity investors is decreasing. Therefore, the outlook for commodities is uncertain for the next six months, says Mr Atul Shah, Head – Commodities, Emkay Global Financial Services.

In an interview with Business Line , he says that the short-term prospects for silver is bearish, while opportunity exists for buying gold if it corrects to $1,400/ounce levels. Excerpts:

Commodities, of late, have been seeing a huge fall. Some feel, they will rebound. What is your take on how commodities will behave in the next six months?

That is correct. Commodities have seen a sharp fall of late. Our sense is that the risk appetite for commodity investors is decreasing. The cost of borrowing money is going up and the factors that drove commodity prices higher are also not present at the moment. Although commodity prices have corrected, they are still at historically higher levels.

The outlook for the next six months remains extremely uncertain. The effects of the most recent monetary tightening in China and India are still to play out completely. Further, there is also a lot of uncertainty with the sovereign crisis in the Europe and the outlook for the pace of economic growth in the US is uncertain.

Markets are also awaiting cues from the US where the Obama Government is try to impress the house of republicans to raise the debt ceiling limit. As long as the debt ceiling is not raised, the US will be unable to provide any more monetary support. In the absence of fresh monetary support and the uncertainty, commodity prices would remain range-bound to negative.

Which commodities are safe bets for investors? Why?

In the medium to long term, there are some very good investment options available. For instance, precious metals – gold and silver both have a long term potential of going higher and hence well-timed decisions could turn out to be very favourable investments.

What role will monsoon play in the movement of agricultural commodities?

According to the India Meteorological Department forecast, this year's rain would be five per cent below the long-term average and thus indicating higher prices for agricultural commodities. However, if we take a look at the sowing pattern the scenario is totally different altogether.

The Department of Agriculture has estimated a slight increase in the paddy sowing area this kharif season. Paddy has been sown on 10.35 lakh hectares (lh) till date compared with 10.32 lh last year. The sugarcane sowing area has risen four per cent to 50.9 lh (48.7 lh). The area under cotton so far has increased 40 per cent to 21.6 lh (1.54 lh).

The area under oilseeds is up almost 16 per cent to 3.47 lh till date, against 3 lh in the year-ago period. Pulses have been sown in 2.86 lh so far, about 5,000 ha more than last year. An area of 8.47 lh has been covered under the cultivation of jute and mesta so far compared with 7.78 lh last year.

Finally, the actual scenario will emerge with the progress of the monsoon in July, a crucial period for rain fed crops.

What can help beef up volume in agricultural commodities?

Volume growth in agricultural commodity could be increased with wider participation from both farmers and traders. If banks are allowed to participate to hedge their risk exposure to farm loans, this could also increase overall activity.

Will silver continue its golden streak? What is the outlook for gold?

Silver experienced an unprecedent rally in the first half of 2011, rising from the lows of Rs 41,280 a kg on January 28, 2011 to a high of Rs 73,600 on April 25, a return of 78 per cent in 72 trading sessions. From the peaks of Rs 73,600 silver prices corrected lower Rs 49,751 on May 12, a decline of 32.40 per cent in 15 trading sessions. Since then silver prices have been range-bound and traded with a negative bias. Silver prices were driven higher primarily because easy money was chasing opportunity and given the relative underperformance of silver to gold, silver offered the best opportunity. The gold silver ratio at historic highs, silver ETF and also net buyers triggered the rise. As seen above, indications are bearish for silver. Hence, in our view, in the short run, silver could be an underperformer.

Given the economic and financial uncertainties, gold prices would continue to rise in the near term. In the short term, gold appears a bit stretch above $1,500 an ounce levels and hence, corrections to $1,400 levels could be used as an opportunity to make systematic investments.

Is demand for e-gold, e-silver and other demat form of commodities picking up? What are the advantages an investor will enjoy from such trading?

In India ETFs were launched in 2007. At present 10 gold ETFs are operating through the national-level stock exchanges. The average turnover of all the gold ETFs put together is Rs 15-20 crore a day. Of this, the ETFs that have come into the scene early like Gold BeEs, Kotak or SBI are doing better than the late entrants.

On the other hand, e-gold, a product launched by National Spot Exchange (NSEL), has a daily turnover of around Rs 150 crore. When the product was launched in March 2010, the daily turnover was around Rs 10 crore and now it has grown to Rs 150 crore, indicating huge demand.

E-series has the provision of physical delivery and the trading time is longer in the evening which helps the investor to take positions when the market is more volatile. Further, e-series products do not have any annual maintenance charges which in turn make it competitive by low holding cost.

How huge is the demand for precious metals, given their rising tendency in the last one and a half years?

The demand for gold is expected to rise by a moderate 2 per cent while the investment demand is likely to see a decline of under 50 per cent. Silver, on the other hand, would see an increase in demand by 15 per cent, while the investment demand for silver could increase by 47 per cent. However, if silver prices rise any further, we would have to revise our estimates lower than the current forecast.

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