Industrial commodities may decline on US rate cut, bullion to follow

A strengthening dollar will likely keep asset classes such as bullion and base metals under pressure in the short term

Industrial commodities including base metals and energy might decline further following a 25 basis point interest rate hike by the United States Federal Reserve. The rate hike is likely to support the dollar, which has been strengthening for the last few weeks on indications of a revival in the US economy.

Strengthening dollar however would keep other asset classes including bullion and base metals under pressure in the short term. In the long term, however, a rebound in base metals and bullion cannot be ruled out.

The interest rate hike ends the seven-year “zero interest rate” regime in the US which may encourage investors to pull out money from other asset classes to invest in the US treasury.
 

“The revival in the US economy would also support metals’ and bullion’s demand in long term. So their prices would rise in proportion to the spurt in demand,” said Jayant Manglik, President (Retail Distribution), Religare Securities Ltd.

Base metals led by copper, zinc and nickel have declined between 25-30% so far this year on weak demand from the US. Copper prices are hovering around $4,500 a tonne on benchmark London Metal Exchange (LME), while crude oil prices have slumped to a fresh multi-year low to trade around $35 a barrel in global markets. An economic slowdown in China, the world’s largest consumer, has also impacted demand globally.

But the interest rate hike by the US Fed will likely strengthen US dollar against major global currencies, including the rupee, despite assurances from the Reserve Bank of India (RBI) of its preparedness for any sharp depreciation in the Indian currency.

“Depreciation in the rupee, therefore, would partly nullify the impact of fall in industrial commodities and bullion in global markets,” said an analyst.

Meanwhile, a CLSA report said that the current bear cycle may last long. In global markets, gold has fallen over 40 per cent in the last five years and silver by a whopping 70 per cent during the same period. The Bloomberg commodity index is hovering around near 13- year low.