New Delhi: Fears of a global economic recession will have a mixed impact on the prices of commodities, as money flows into this asset class seen as a safe haven in the wake of weakening equity and money markets.
Economists and analysts said record-breaking gold will see new highs, industrial metals and crude oil will become cheaper and most agricultural commodities will stay flat as fears of another recession grips investors after Standard and Poor’s downgraded US debt last week.
“There is a likely scenario of a double-dip recession with risk-aversion quite clearly tilted in favour of gold,” said Shubhada Rao, chief economist at Yes Bank Ltd. “But also, in the entire commodities space, there would be concerns, and growth-oriented commodities like copper, aluminium and crude oil will be down.”
Rao said gold’s appeal for investors is likely to stay strong. “Gold has seen a secular rise since the collapse of Lehman Brothers (in 2008), and it would continue to shine as the current risk-aversion is unlikely to abate soon,” she said.
On Wednesday, gold was quoted at Rs25,607 per 10g on the Multi Commodity Exchange of India (MCX)—near its all-time high of Rs.25,826 per 10g reached a day ago, and up 42% from Rs18,093 a year ago.
Non-bullion commodities will likely see more downside with industrial growth flagging in developed countries and China and India curbing growth with interest rate increases, said Madan Sabnavis, chief economist at CARE Ratings.
“What we have seen so far is a knee-jerk reaction to S&P’s downgrade. Gold is up, other metals and crude are down, agri commodities are constant,” said Sabnavis. “What remains to be seen is how much more the non-bullion commodities can fall when the news gets digested.”
Crude oil was quoted at Rs3,582 a barrel, down nearly 5% from Rs3,754 a year ago on MCX, while copper was quoted at Rs395.4 per kg, nearly flat from a year ago.
Both Sabnavis and Rao said US policy decisions will determine the direction commodities will move in, but broadly the same trend is expected to continue.
Agricultural commodities rubber and cotton are likely to fall as people may curtail spending on automobiles and clothes. Food items, such as cereals, edible oils and sugar, are expected to hold out or push higher as people are unlikely to cut spending on essential items.
Broadly, most of the consumption-based commodities will take cues from demand and supply, rather than the macroeconomic environment, analysts said.
In the edible oil market, oversupply of palm oil is likely to keep prices down, while corn may rise owing to lower sowing in the US, said Kishore Narne, senior vice-president at Anand Rathi Commodities. Pulses are expected to shoot up on lower sowing in India, which is a major consumer of the commodity.
Coffee prices are expected to rise globally as there are supply issues, said T. Gnanasekar, director at Commtrendz Research. Also, if fears of recession exacerbate, people may consume more coffee when they can’t afford alcoholic beverages.
Investors seeking to diversify from equities and currencies are unlikely to play the volatility of the farm market.
“There might be some interest in agri commodities from investors, but it may not sustain,” said CARE’s Sabnavis. “Agri commodities are unique and have their own individual set of investors.”
Rao said if the US government pumps in more money into the financial system through a third round of quantitative easing, some of it could flow into commodities. In that scenario, it would correct the downward trend in non-bullion commodities while taking gold even higher.
Analysts said the price forecast for gold was looking up, but there would be choppiness in the markets as many investors are in this market currently.
“If anyone has an exposure in commodities, it is in gold,” said Narne. “It can still go higher and touch $1,800 per ounce (from $1,778 currently).”
But there is a chance, the price could fall as well.
“I have an uncomfortable feeling about gold,” said Gnanasekhar of Commtrendz Research. “It will be choppy and there could be corrections because it is over-bought.”
Crude oil is seen easing with people cutting down on travel, and the price could fall to $75 a barrel, said Sunil Gunturi, technical analyst at MF Global. But any cut in output by the Organization of Petroleum Exporting Countries could arrest the fall, the other analysts said.
In India, commodities are facing competition from fixed income products.
With the Bombay Stock Exchange’s benchmark equity index, the Sensex, looking weak, some investors are diversifying into gold. Many, however, are seeking to park funds in bank deposits, Narne said.