Lack of trust in paper currencies should benefit gold, says analyst

Rising bank rates could result in savings being invested in gold, though the yellow metal faces risk due to de-hedging. Mr. Anand James, Chief Analyst, Geojit Comtrade Ltd, in an interview to Business Line says that the downside to turmeric may have been over, while Rs 300 a kg is a possibility in rubber.

Excerpts:

How are commodities, in general, likely to behave in the near to medium term? What factors will influence their movements?

A lot of commodities, especially agro-based commodities with Indian origin, are going through a phase where in supply is on the rise, thanks to conducive weather. However, the advantage of ample supply has been mostly lost out to the inefficiencies in infrastructure, storage, distribution and regulation. The cumulative effect of these factors has resulted in a flare up in inflation, forcing monetary policy tightening, stifling growth.

How will gold behave for the remaining part of the year? Will silver toe gold? Which are the key issues to watch out for the movement of these precious metals?

Gold should continue to benefit from the growing lack of trust in paper currencies. Unlike in the case of gold, speculative interest has been a large influence on silver prices. This would mean that though silver would follow gold closely, the volatility in silver should be higher than that of gold.

Fed's additional stimulus, would be a major boost to bullion prices. The chances of return of gold standards, even as they remain only a scant possibility, puts Central Bank buying back into focus. IMF had already completed the agreed sales by the end of 2010. However, the low rate of hedging by miners point to their confidence in continued rise in gold prices.

However, the completion of de-hedging by world's top two miners Barrick Gold mine and Anglo Ashanti Gold mine reduces the chances of rapid advances, as seen in 2009 and 2010. Irrespective of these factors, India would continue to be a solid driver to gold's price rise, as its buying pattern is unique.

According to the World Gold Council (WGC), India accounted for 963 tonnes or 32 per cent of the global consumer demand. WGC estimates put 7 per cent of this to be from households. Rising bank interest rates would be mean that these savings would plough back to gold, and the household's contribution is bound to grow.

Where is natural rubber headed towards? Why?

While a neutral weather pattern expected in Thailand and other major rubber growing countries in the South-East Asia induce supply disruptions as against previous years, conducive climate in India has stepped up tapping even through the traditionally lean season.

At the same time, auto demand has suffered from successive rate hikes in China as well as India, the major consumers, thus keeping prices under a lid in the first six months of 2011. Meanwhile, firm fuel prices have also dampened economic activity, reducing OEM demand, but replacement demand has suffered less.

However, price behaviour in the last six months are indicative that markets may have already factored in the double whammy effect of lower demand and higher supply, and have realigned to project a strong second half of the year, as India is fronted by a must-do expansion requirement for roads and other transportation infrastructure. Higher projected growth in healthcare and personal care segments should also ensure that demand for latex would be in direct competition with tyre demand.

In such a scenario, for RSS4 prices presently trading at Rs 215/kg , Rs 300 levels may be a fair possibility.

What about other agri commodities such as turmeric, jeera and chilli? Will increasing exports of value-addition have an effect on their prices?

Turmeric has suffered from a bubble like price rise, in the last few years, and rise in acreage prompted by lucrative prices that have prevailed for years. Jeera and chilli has suffered by vacillating export demand, but improved Government initiatives in cold storage should benefit chilli.

Are base metals heading to a situation of supply exceeding demand?

Both zinc and lead are in surplus, with LME monitored stocks of both at record highs. Data from International Lead and Zinc Study Group for the first four months of this year showed a surplus of 74,000 tonnes and 1,78,000 tonnes in lead and zinc respectively.

Aluminium stocks are also at a high. Chinese production is slated to increase by at least 8 per cent. However, it is not sure, if all these surplus stocks are immediately available for consumption or locked in finance deals.

Nickel's stocks in LME warehouses, on the contrary has come down all through this year, and is presently at early 2009 levels. Copper's stocks in LME are near the year's high but are far lower than record peaks. This commodity has benefited from an investment interest as well as shown in rising volumes in MCX.

How far will India's economic growth play a role in prices in the domestic market of bullion and metals?

. Rising bank interest rates would mean that savings will be ploughed back to gold, and the household's contribution is bound to grow.

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