The 2016 has penned down some big stories about commodity price movements and fortunately market participants have earned a massive return so far. Despite China slowdown, the recovery on prices was seen on the back of the growth story of other emerging nations. Indonesia, Thailand, Malaysia, Philippines and Vietnam along with India, some improvement in US economic conditions are giving strength to the rally. Heroic performance of crude oil gave tremendous buying opportunities to the market participants. Bullion appeared as true protector of the portfolio once again, gave return of more than 30 per cent. Base metals were also active and some of them performed amazingly. Zinc performed miraculously. Closure of mines and expected supply tightness sent prices up by more than 50 per cent. Copper and lead, too have the similar story. Dollar weakness, volatile equity market, delay in interest rate hike by Fed, investment demand and closure of various mines, geopolitical tensions, improved physical demand and more reasons collectively supported the upside in commodities, and finally Brexit nailed the victorious year for the bullion counter. However, it damaged the sentiments in energy and industrial metals counter to some extent as there was an expectation that trade will get affected and it will give some impact on currencies as well. CRB, the commodities index, recovered from the low of 155.33 to the high of 196.71, after a continuous five years downside.
Third quarter is about to end and festival season has already knocked the door. It will give some lucrative trading opportunities to the investors.
Bullion: Fed is expected to raise interest rate by December; however gold and silver are expected to see more upside on festive demand. Investment demand is already attracting inflows. At present, ETF investment is swelling. Any improvement in the physical demand may give more upside to the bullion counter and if crude reignites again it will give more room for upside. The US dollar is a major factor when it comes to commodity prices as it tends to have an inverse value relationship with raw material prices. It is down by 2.74 per cent so far in 2016 and will continue to give support to the commodities prices.
1) Gold: It is recommended to take buy position in gold and silver. For gold, Rs 33,000 is the target for 2016. On lower side, it may take support near 29,500.
2) Silver: MCX Silver can see the upside of Rs 52,000 per kg. Gold-silver ratio is expected to increase, means silver is expected to outperform gold in 2016 and in coming years.
3) Lead: One may consider investing in lead. Some economic improvement in China recently amid some mines closure is giving upside to the commodity. As Zinc’s rally looked overstretched, one may prefer lead. At the same time, the accommodative monetary policies of the world’s central banks will continue to keep interest rates at historically low levels, which have been a supportive factor for commodity prices. To note, the overall global lead mine production dropped by nearly 6.8 per cent during Jan-June ’16 when compared with the corresponding six-month period in 2015. Lead mine production reported decline in countries such as Australia, India, China and the United States.
For lead, our upside target will be Rs 145 for the year 2016. One should accumulate between the range of Rs 122-126.
To conclude, it is expected that the commodities will continue to outperform the dollar and once again markets will continue to draw attention. It is the time to see higher lows and higher highs in commodities.
(The author is DK Aggarwal, chairman and managing director, SMC Investments and Advisors)