Jonathan Barratt, managing director of Commodity Broking Services, a leading brokerage and investment house in Australia, spoke to Krishna Merchant on why commodities are falling and the outlook. Edited excerpts:
There are concerns that growth may get slower, globally. Do you see a further correction in commodities?
There is a big concern that the US may slip back into recession. As a result, we are seeing a lot of selling pressure on economy inputs like oil & copper. To check the cost of primary raw material, the Federal Reserve will engineer the dollar higher in order to get primary inputs lower. That is why the dollar may remain firm and on the flip side, the rupee will actually remain weak.
Are you seeing investors liquidating their positions in crude (oil)?
We feel crude will become cheap, under $85/barrel, Nymex, given the economic and debt concerns. Anything below $85/bbl is relatively cheap. If the US economy falls into more of a recession and unemployment numbers continue to rise, it would be a very fast event and investors would book profit due to panic in the market.
Do you expect QE3 (a third instalment of quantitative easing) in the US?
We expect the US Federal Reserve to use other means to stimulate the economy. QE1 and QE2 did not really help, as unemployment remains at 9.3 per cent. I think the prospect of QE3 will placate the market, help allay certain falls, but not translate into creation of jobs.
So, gold should be the most sought asset?
People are nervous and moving into cash and also realising their profits in gold. If the turmoil continues in Spain and Italy, and growth concerns in China continue, the market will be clearly focusing back on gold.
The trend line resistance is $1,660 to $1,672/oz. We would like to see a pullback in gold before we actually buy it.
What is the road ahead for metals and other industrial raw materials?
Base metals are over-bought. The strike in Chile is expected to be resolved but copper supply may remain disrupted. Copper prices are still high and it can head towards $9,000 per tonne on the London Metal Exchange. In iron ore and coal, when you look at the current pricing, the market is factoring in continued demand from China, but one of the big concerns is that slowdown in China may affect the demand for iron ore and coal.
Any bets from the agri-commodity space?
Globally, agri-commodities remain under pressure and any dips could find buyers. We still favour soybean, wheat and corn.
