‘Gold could lose $30/oz if US debt crisis is solved'

Things aren't bullish as it seems in the commodity market. Mr Kunal Shah, Head – Commodity Research of Nirmal Bang Commodities, in an interview to Business Line through e-mail says that emerging markets are finding it difficult to tackle inflation. The ongoing debt crisis in the US and Europe is another worrying factor, he says.

Excerpts:

What could be the safe bets for commodity investors this year? Why?

Crude oil prices may drop by 10-15 per cent during this year. There is more downside risk in crude oil in the months to come. Inflation is becoming a global problem rather than of just the emerging markets.

Emerging markets, the growth engines of the global economy, are finding it really difficult to tackle it. We have seen an aggressive approach towards interest rate hike in India and China resulting in rising borrowing cost. This may hurt growth resulting in drop in demand of industrial commodities. There is growing evidence that in the euro zone, the weakness in the peripheral economies is seen spreading to the core, with even Germany seen losing steam, resulting in slower growth over the coming quarters. Release of crude oil from strategic petroleum reserves (SPR) by International Energy Agency may result in high inventories in the US, which is the largest consumer of crude oil, putting pressure on prices. Despite the crisis in Libya and other West Asian countries being not resolved, crude oil prices have corrected by over 20 per cent from their peak. I feel crude oil is not based on supply concerns but is about demand destruction.

I recommend going short in oil between $99 and $101/barrel and expect it to test levels of $88-85 during next quarters.

Gold seems to be touching new high every day. Where do you think it is headed before the year-end? What are the chances of a pull-back?

There is a lot of euphoria when it comes to gold, not just in India but across the world. The ongoing debt crisis in the US and Europe has helped precious metals as investors seek refuge from uncertainties which may arise if peripheral economies in the euro zone or US default. Further downgrades are expected for European peripheral countries. Rating agencies Moody's and Standard & Poor's have already put the US on review for a possible downgrade, with S&P saying earlier this month there is a 50 per cent chance this will happen by the end of October. The possible downgrade of the US can result into a spike in gold prices. But I feel one should wait for a correction to buy as if the US debt limits get raised, we may see a correction of $30-40 an ounce in gold, which should be good levels to enter into a long position (around $1,560-1,570) in gold and by the year end it may test levels of $1,675.

Will silver also rise in tune with gold?

I am not very bullish on silver. Of late, it is under the limelight again with a sharp up move in the last one and half months. I think silver may remain an under performer compared with gold. The spike in silver prices in the first quarter was mainly liquidity driven, thanks to quantitative easing (QE2), which played a major role in the rapid rise seen in silver prices. If there are no more QE packages given out, then silver may find difficult to go above $42.5 for the rest of the year and on the downside it may again test levels of $34-34.5 an ounce in the coming quarters. From an Indian perspective, silver prices may find it difficult to move above Rs 63,000-64,000 a kg.

Car sales have slowed down. Will it have any effect on platinum and palladium prices?

Yes, rising borrowing cost in emerging markets may adversely impact on car sales, which will in particular have a negative impact on the prices of platinum. Platinum prices are likely to remain under pressure in the coming quarter.

Will fears of economic slowdown have any effect on base metals? How true are the fears of the slowdown?

Currently, base metals complex is showing strength on account of supply concerns in metals such as copper, nickel as strikes in major mines have disrupted supply. The drop in HSBC flash PMI of China is actually a warning sign for base metals which have been rallying since last month. The latest Chinese GDP data actually surprised many with actual GDP beating forecasts by 0.2 per cent at 9.5 per cent. This growth is mainly investment-led growth and consumption. Interestingly in a report in June by the National Audit Office, China's leading auditor, it surfaced the local government sector which is responsible for many of China's major infrastructure projects, was heavily in debt with borrowings of 10.7 trillion yuan ($1.7 trillion) in 2010, around a quarter of China's GDP clearly indicating that their growth model is investment driven. Chinas flash purchasing manager index for the last month has shown contraction from 50.1 in June to 48.9 in July. Inflation may rise from 5.5 in the month of May to above 6 per cent calling for further tightening eventually leading to drop in industrial activity.

The fear a of slowdown in China is for real and remains a bigger threat than any other crisis. In the near term, supply concerns are dominating the base metals complex but I think by the end of the year we may see a substantial correction of 10-15 per cent in prices of industrial metals. Imports of base metals have declined sharply compared with last year evidently showing that demand from China is not robust.

What the prospects for agri commodities for the remaining part of the year?

Monsoon remains a very important factor in determining the trend for the prices of agricultural commodities. The South-West monsoon has remained subdued over Rajasthan in the last month causing rapid rise in prices of commodities such as guarseed and others. I don't remain very bearish on the complex but with expectation of a pick-up in monsoon in north-west India and western Rajasthan, I believe we are going to see some haul in a rally of agricultural commodities. Among agri commodities, I remain bullish on spices such as red chilli and cuminseed. The upside in the edible complex is very limited and I think in this quarter soyabean and soya oil prices can correct by 8-10 per cent if the weather remains favourable in US, Brazil and Argentina.

I see a limited upside for the next quarter in prices of sugar because the latest estimate releases from the Ministry of Agriculture indicates we may have a bumper crop this year. Sugarcane acreage in the country is 2.70 lakh hectares higher than last year. Higher area has been reported from Uttar Pradesh and Maharashtra. Production is estimated around 26.3 million tonnes in 2011-12 against 24.2 million tonnes.

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