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Informist, Wednesday, Oct. 23, 2024

 

By Sandeep Sinha

 

MUMBAI – The bullish trend in gold is likely to continue in 2025 and the price is expected to reach $3,100 an ounce on the COMEX, giving at least a 10% return on investment, according to Kunal Shah, head of commodities research at brokerage firm Nirmal Bang. Investors should buy gold with a horizon of one to two years and not three months as after such a humongous rise, some profit taking or downside is likely due to technical factors, he said. "If they (investors) want to create a position and want alpha, it will come by holding gold for a slightly longer period rather than a shorter period because gold has already outperformed," Shah told Informist in an interview.

 

According to Shah, the current rally in gold will sustain, as it has more wings to fly, and its price could reach $2,800-$2,850 an ounce by December-end from $2,764 at present. There is uncertainty over inflation. "The way the global economy is playing out right now, nobody knows what will happen to inflation in the future--whether it will come down or shoot up. The possibility of it rising is high. The geopolitical scenario seems to be worsening, people (investors) are shying away from the US dollar and US bonds, which should also lend support to gold. All these factors make me believe that the bull run (in gold) is here to stay," he said.

 

When asked about what was driving the current rise in gold prices, Shah said there have been significant additions to the derivatives positions. The latest Commodity Futures Trading Commission data showed money managers increased their long positions in COMEX gold by 9,001 lots to 235,284 lots (731.82 tonnes) as of Oct. 15.

 

The global central banks have been big buyers of gold in the last three years. Most central banks are either selling the US treasury or not buying it, and they are adding gold. This trend is going to continue, irrespective of the price. "They (central banks) have no choice but to have gold in their portfolios as a hedge against massive devaluation of any currency which may take place. A currency is losing its value and that is being reflected in gold prices," Shah said.

 

"This year global central banks may not be able to procure the same amount of gold which they procured in the last two years and may end up buying around 900 to 950 tonnes. I'm assuming that in the next two months, they (global central banks) will be buying aggressively," he said.

 

Another factor that has driven demand for gold according to Shah is the surge in global debt, which has reached $100 trillion. The global debt has risen at an alarming pace as most central banks resorted to money printing during COVID-19. The US debt had hit $35.7 trillion this year and the scenario before the interest rate cut took place in the US in September, the US Federal Reserve had to pay more than $750-$780 billion as interest to service their debt. "Now, as of today, even with the 50 basis points interest rate cut, we have seen the US government has to pay $1 trillion as interest to service their debt. This is not the trend with just the US, this is the trend with Europe, and this is the trend with Japan," said Shah.

 

Moreover, many currencies are losing their value, driving investors to the yellow metal. "There is so much money supply in the system, the value of paper money is going down, the fear that how this debt is going to be serviced? What is going to come after this is an aggressive interest rate cut because they (debt-laden countries) are not going to service their debt, and at some point the central bank will not care about inflation".

 

The actual scenario three or four months down the line would be the US Federal Reserve and the European Central Bank cutting interest rates aggressively to service their debts. "The answer lies that there should be insurance, which investors should have and that the only insurance premium which you need to have in your portfolio is gold," Shah said.

 

SILVER

 

Referring to the rising prices of silver and the current short supply of the white metal, Shah said, "We are very bullish and continue to remain upbeat on silver at the current level. Three years of deficit in the market is a strong case for the bull run. If there is no incremental growth in the supply side, the prices of silver can abruptly shoot to $37, $38, or perhaps $40 an ounce (INR 125,000-INR 130,000 a kg). I am of the view that silver's rally has more wings to fly," Shah said.  

 

Also, more players are entering the scene, Shah said, highlighting that the Russian Central Bank recently said it plans to add silver to its reserves, which is a new trend. This is a big surprise that the Russian central bank wants to have silver in its portfolio as a diversification of reserves, which is a new demand. Shah said that other central banks may try to emulate Russia. "There are shortages in silver, it looks good, and it's also a precious metal, so why not add? Russia is setting an example for other central banks that they can diversify not only into gold, but also silver. This is the new demand, he said.

 

CRUDE OIL

 

When asked about crude oil prices, Shah said that during the time of the US presidential election, one generally sees the upside to the prices of the commodity being capped. Israel has said that it is not going to attack Iranian oil facilities and nuclear plants, and it has a bearish sentiment for crude oil. The geopolitical premium has waned after this announcement. "The Organization of the Petroleum Exporting Countries (OPEC) has come up with a statement that from December it is going to increase its output. All of these have led to a scenario where oil prices have entered a tight bear grip and I believe it can test $65 a barrel on the West Texas Intermediate on the lower side and on the MCX it should translate to almost about INR 5,500-INR 5,550 a barrel."

 

Shah believes that WTI prices can come down to $65 a barrel, but that will again be a buying opportunity and one could see a bounce of 10%. "I believe that the upside in the near term may be capped, but the downside also will be capped, so I am expecting a range-bound session where at dips I will try to accumulate oil."

 

BASE METALS

 

Shah said the recent policy support and interest rate cut announcement by China will be enough for selling the existing inventories and maybe that would lead to some upside in the sector. "However, whether this can lead to structural buying in Chinese housing and property sectors, will the construction sector be re-rated, new production goes up and people start buying -- I don't think so, for that there has to be a direct package like the US gave in the COVID-19 times," he said.

 

In Shah's opinion, the Chinese government needs to announce a package of $1 trillion, something which would lead to a massive rally in metals. However, with the kind (current) of measures, the downside is protected and so is the upside. So it's going to be a market where prices of base metals will not fall sharply. "There can be a possibility of a 4-5% rise, but beyond that, I don't see anything drastic happening because of the inherent weakness. China needs more than rate cuts, more than reserve requirement ratio (RRR) cuts, and more than just a small fiscal stimulus. They need a massive one for the restart and jump in economic activity."

 

Shah remains bullish on copper and aluminium from one-year investment perspective. Copper has the potential to shoot back to $10,500 a tonne and aluminium, too, could rise to INR 260-INR 265 a kg on MCX. The cost of producing aluminium is spiking and that will also encourage miners to increase prices. On the supply side, alumina is in short supply because of various reasons and that should also support the downside in aluminium because it cannot go down below a certain level, so these two metals look relatively good, Shah said.  End

 

Edited by Deepshikha Bhardwaj

 

 

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