Trade Talk – Demand for physical gold seen sluggish, but silver seen rising in short term on poor supplies

Gold has been amongst the pick of the asset classes from last three years as a result of its ability to deliver decent returns during times of uncertainty. With the prices trading in MCX at Rs. 50,000 per 10 grams, a record high is registered in domestic markets, thanks to the devaluing of the Indian rupee and also the global factors supporting the yellow metal as a safe haven.

We have witnessed a long bullish rally in gold earlier supported by the lower interest rates and then the US-China trade concerns, and now the pandemic.

Sunil Kumar Katke, Head – Commodity & Currency, Axis Securities

Unlimited stimulus measures by major economies is devaluing other asset class performances, making gold a lucrative investment opportunity in this crisis. The investors’ confidence in gold can be witnessed with the record inflows in Gold ETF’s during the first half of this year, which outpaced yearly averages of last five years and the rising Covid 19 cases adds to the uncertain future state of global economy.

Domestically, the physical demand is hit due to the lockdowns and is expected to return to normal as the lockdown norms are being eased out. With rise in prices of gold there is also a flurry of gold scrap sale, which may put breaks on demand for some time.

Some large gold retail houses have started seeing some sales happening as pending purchases during the lockdown were executed by most consumers as per their personal requirements for marriages, functions etc. Also, the spending reduced due to lockdown on limited participation across marriages/functions is getting converted to gold as we interacted with some big-time jewelers.

We expect the physical demand to remain sluggish for some time in domestic markets and expect to continue seeing increased demand for gold in electronic form as the asset allocation percentage is getting bigger for this asset class.

Silver

Silver on the other hand has hit a nine-year high in domestic markets and is trading above Rs. 60,000/kg after touching Rs. 62,000. The rally in silver from investment perspective was pending from almost two years, and finally found a trigger in July 2020.

With easing lockdown norms and stimulus measures to boost manufacturing by major economies, the white metal has rallied as a safe haven and as an industrial metal. The 5G infrastructure sector is expected to drive silver demand up along with the smart gadgets or the solar energy sector in the coming months.

The gold to silver ratio is also covered during last three months as prices have rallied by almost 80 percent from their March 2020 lows. We expect the disruption in mining activities due to the pandemic to impact supplies and drive up prices to an extent. With all the above fundamentals, we expect the domestic silver prices to touch close to Rs. 65,000 mark soon before we see consolidation.

Crude oil

Crude oil prices have managed to survive above $40 mark after the historic negative settlement in April 2020, the easing lock down norms and output cuts by major producers were able to drive the prices up and hold the levels of $40+ for both WTI at $41 and Brent crude oil at $44 mark.

Domestically the prices have stayed around Rs. 3100 level from a week and are range bound due to the balance created by supply cuts and lack of physical demand. We expect the WTI Crude oil prices to correct to $35 mark in a month or two owing to the rapid increase in Covid 19 cases and its impact on consumption which should drive domestic prices to Rs. 2700 mark at MCX.

Base metals

Base metals have bounced back well as major economies are pumping in money in the form of stimulus to support the manufacturing sector backed by opening up of lockdown restrictions. 

Pick of the commodity in this segment is copper where the LME deliveries have started happening with Chinese copper imports doubling year on year. In Indian markets, the prices were close to Rs. 400/kg a few months back compared to the current levels of Rs. 510/kg with a jump of almost 25% in prices. We expect the prices are over bought based on current fundamentals and expect consolidation in the coming days and may see levels of Rs. 450 per KG for copper again

Agri sector

Better-than-expected monsoon this year has put pressure on prices of most agricultural commodities. With most agri commodities trading below their minimum support prices (MSP), the lockdown has hampered the overall demand and oversupply has kept prices under pressure.

For instance, chana prices are below the MSP by almost Rs. 500 per quintal (MSP Rs. 4,620 vs current price of Rs. 4,120 per quintal) as the acreage is better backed by weaker physical demand due to the lockdowns across major mandis in the past. Mandis have opened up now and demand is gradually picking up from millers, but sales by NAFED at higher levels is curbing the rally in prices.

With farmers planning to sell their stocks at centres at MSP, the supply in mandis may get affected leading to a short-term spike in prices towards Rs. 4,300 levels.

The domestic soybean prices on the other hand have remained weak due to the higher-than-expected sowing this year and a lack of demand of soya meal from poultry industry due to the Covid 19 lockdown. Weakness in edible oil prices have also kept the prices under pressure and we expect the prices to stay in the range of Rs. 3,700-3,900 per quintal in the coming months.

Cotton prices are hovering around Rs. 16,000 mark as the textile mills have started functioning at 60 to 70 percent capacity as the lockdown restrictions are being eased. However, the acreage is higher by 78% percent this year compared to last year and the available stock with jinners is leading to lack of demand and hence the prices may stay under pressure and we may see the same bottoming at around Rs. 15,500 to Rs. 16,000 levels.

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