Gold prices have once again climbed to record levels of $1264 last week before correcting on profit taking thereby cementing the appeal of the yellow metal as a safe haven for investors. China announced its move toward a more flexible currency exchange rate mechanism which has improved the investor sentiments in general but the softening of the dollar has helped the recent surge in gold prices to record levels.
This has led to further bullish forecasts on gold prices with some analysts quoting $2000 gold with in a year. In this scenario, Atul Shah, Head, Emkay Commotrade in an interview told Sreekumar Raghavan of Commodity Online that he expects gold to immediately target $1300-1500 and global supply-demand factors will weigh on market sentiments rather than domestic factors. Excerpts:
COIL: For the past few weeks the focus was on gold with prices hitting all time high of $1264. Gold bulls have come up with predictions of $1500 to $2000 within a year. What is your outlook on gold considering the present Euro Zone crisis and mixed economic data from China and USA?
AS: The strong gold price performance during the 2010 was sustained by investor inflows, Uncertainty in currency market due to European debt crisis and huge investment demand through gold ETF combine with strong jewellery demand in China and India. As an asset class, gold outperformed compared with the broader commodity complex and international equities on a risk-adjusted basis. On average, gold remained among the least volatile of the commodities, with annualized average volatility falling to 17.6 percent from 20 percent in the previous quarter. On investment demand front, the world's largest gold-backed exchange-traded fund, SPDR Gold Trust is holding record level of 1,306.14 tonnes of gold as of date.
Considering the current fundamental factors gold is no doubt in a long term bull run with immediate target of $1300-$1350.
COIL: Globally, equities had a disappointing time until recently but seem to be showing buoyancy reflecting increasing risk appetite- India IIP data also re-energised the stock market? In your view, will the increased risk appetite lead to weakening of gold prices?
AS: The inverse Co-relationship of stock market and gold is no more working in current scenario, because the fundamentals are totally different. It is visible from last few days that Dow Jones Industrial average (India-Sensex) and gold are moving upward direction. Thus, expecting gold prices to weaken only on the basis of recovery in equity market is not a valid reason.
COIL: How far will India's weakened gold buying during June-July impact global prices even though occasional bouts of profit taking on dips are part of the market trend? AS: Indian gold trade has been witnessing slackness in buying since the start of May as record high prices dented demand. May imports fell to around 17-18 tonnes from 28.6 tonnes in the same month a year ago as per the statistics of Bombay Bullion Association (BBA).
Rural India, which accounts for 65 percent of the total demand, divert their savings to buy seeds and fertilizers for their kharif crops, leading to limited demand for the metal in the month of June-July. However considering the uncertainties in global economies specifically in Euro-zone countries, safe haven demand in gold cannot be ruled out. Global demand and supply fundamentals are expected to play leading role over domestic factors.
Normally, silver prices track gold but offlate that was not quite usual. Now globally silver prices are holding on its own which is evident from the gold-silver ratio which has fallen to two-week low this week. What in your view are the near to medium term prospects of silver?
COIL: Uncertainties in global economies specifically in Euro-zone countries have initiated safe haven buying in gold and reduced funds from riskier assets like base metals. Recent sell-off in base metals has kept pressure on silver prices as silver is also used as an industrial commodity due to its manufacturing uses, which in turn dragged the gold-silver ratio to its monthly low below 65.
AS: On 21st June 2010, China allowed its currency to strengthen after pledging to make the Yuan more flexible, raising hopes of higher demand from the world's top consumer of many metals including base metals. This development is expected to support base metals which in turn are expected to support silver prices in near term.
COIL: Among precious metals, silver prices are often linked to base metals price movements. Offlate, there has been a surge in base metals and energy prices. What factors have led to this rally and do you expect the trend to continue. AS: The surge in base metals was mainly due to short-covering after s sharp fall due to Chinese fiscal tightening and Euro-zone debt crisis. However in case of crude oil the rally was mainly due to core fundaments. As per the meteorological department the upcoming hurricane season in U.S. could be a top 10 active years. In current season 16-18 storms are expected, out of which 5 storms are expected to develop as hurricanes.
To put that in perspective, only eight years in the 160 years of records have had 16 or more storms in a season. The season should start early with one or two threats by early July, and stay late with additional threats extending well into October. The 2010 Hurricane Season in the Atlantic Ocean began on June 1, 2010, and will end on November 30, 2010. Atlantic hurricanes affect the eastern and Gulf coasts of the U.S. and the Caribbean nations. Considering the overall fundamental outlook for crude oil is positive.