Central banks in Asia and Europe are eagerly awaiting opportunities to raise gold holdings that would drive demand of the yellow metal towards record highs, said Paul Horsnell, managing director and head of commodities research, Barclays Capital, in an interview with Dilip Kumar Jha. Edited excerpts:
What is the outlook for commodities?
Gold and tin have hit record highs; others like silver, copper and corn have also touched multi-year peaks. While the current price rise has been attributed to the dollar’s weakness, the underlying fundamentals continued to strengthen them favourably. Our own research says, gold will hit $1,850, crude $85 and tin $25,500 by 2011. Select agri commodities like wheat, corn and soybean will hit record highs to cents 700, cents 540 and cents 1,085 per bushel by the end of the current quarter and will start softening early next year. Demand of platinum has also risen sharply in Asian countries, including India and China. We are bullish towards platinum which is set to touch $1,750 an oz by December 2011. The dollar, however, will appreciate to settle at 1.3 against the euro from the current level of 1.41 in one year from now.
Do you see gold demand softening at the current high price?
The appetite for gold from consumers as well as investment bankers, including regional central banks, is unchanged. In fact, central banks in Asia and the Middle East countries, including the Reserve Bank (of India), are looking for opportunities to increase their gold holding to make it a significant portion of reserved currency asset class. China, the largest gold producer, currently holds a marginal 1.7 per cent of gold reserves, while India stands at 7.5 per cent.
The bulk demand is expected to come from central banks of many countries, while retail consumer (physical and paper) demand will continue to flow, irrespective of price movement. Surprisingly, scrap recovery at the current price remained much below our expectations, a clear indicator of consumers’ expectations of further price bullishness. Apparently, demand for fresh gold has slowed down a bit but still continues.
Is platinum gaining momentum in India?
Yes. Platinum demand has been on the rise. But, gold remained a preferred precious metal in India and will continue to remain in the future as well.
What impact do you see of QE II on commodities?
QE II (quantitative easing from the Federal Reserve), better understood as lower interest rates, is unlikely to help commodities move either side massively. QE II was anticipated much in advance by the markets which gave countries and market participants an opportunity to prepare for the impact well ahead of its introduction rescheduling underlying fundamentals accordingly. Therefore, QE II is not going to surprise the market to have a major impact on commodity prices. Commodities prices are, anyway, functions of demand-supply, which currently supports a bullish trend in commodities.
Is a deferred strategy good or bad for investors in commodities ?
Deferred strategies (holding portfolio in one instrument through various options) gained momentum after investors realised that holding a diversified portfolio in commodities was not enough to spread their strategies. Therefore, they needed to hold multiple strategies to manage their exposure actively. Deferred strategies helped investors avoid bunching, beating passive benchmarks by timing their trades to avoid index roll period and, most important, taking advantage of changes.
Admittedly, over the past few years, deferred strategies have outperformed the straight portfolio diversification through single instrument. We believe that outperformance reflects the shift to a new scenario of strong fundamentals and a broad uptrend in commodity prices. Over the past decade, the focus was on the consumption pattern in China and other emerging markets. Now that China’s role in the commodities markets has been assimilated, the focus is again on portfolio diversification.
What is your price forecast for base metals?
Copper is the metal where supply-side constraints are prevalent. So, copper prices are likely to average $7,375 this year and $8,038 in 2011, as against $5,148 in 2009. Aluminium may rise to $2,250 in 2011 from $2,126 in 2010, while zinc and tin will surge to $2,250 and $25,000 next year from $2,130 and $19,469 this year, respectively. Nickel will settle next year at $22,375 from $21,535 in the current year and $14,604 in the last year.
Will the ongoing currency war have an impact on global commodity prices?
The dollar has a strong co-relation with gold and the US currency’s movement does affect the yellow metal. Other currencies have not yet proved their linkages with commodities and hence, barring a marginal change on regional basis, there will be no major impact of currency re-valuation on a global scale.
