After global markets witnessed a steep fall in gold and crude prices, Tom Price, Global Commodity Analyst, UBS Equities Research feels there may be a cut in production if gold price falls below USD 1,250-1,280 per ounce.
“I am not proposing that is where we are going next, but it is certainly a number that you might want to think about as an extreme low, he says in an interview to CNBC-TV18.
Meanwhile, he is biased on the Brent over WTI and feels Brent price movement will depend on how European markets perform going forward.
Below is the verbatim transcript of Tom Price’s interview on CNBC-TV18
Q: Give us a word on the collapse of gold. Has there been a basket institutional selling? Do you foresee more pressure for gold now?
A: The catalyst that has dominated here is the announcement that Cyprus was preparing for gold sellout. We spoke to institutional investors in equity markets and in gold markets. The feedback from the Europe is that there was a concern that policy might spread to other marginal economies and Europe said that would include Spain, Italy and many more. The potential broad application of that policy looks like it is the main catalyst for the sell-off.
Q: It has been a bit of a free fall through Friday. At this point, what kind of levels are people talking about in terms of support for both these precious commodities?
A: We are thinking of a price support of USD 1,420 per ounce. It was based on technical analysis and looks like there is some evidence of support right now at USD 1,350 per ounce. As a fundamental analyst, look at the bottom-ups aspect of the market, marginal cost of production is extreme low.
We estimate the marginal cost production to be about USD 1,200 per ounce. So, the economic thinking behind the marginal cost production is that you are touching at the top end of the cost curve. If it falls below USD 1,250-1,280 per ounce, you risk a deep cut in production if it proves to be sustainable at that level. I am not proposing that is where we are going next, but it is certainly a number that you might want to think about as an extreme low.
Q: The big fear for people tracking global asset classes is that there is a bit of a margin crisis developing in some of the commodity markets. It may lead to collateral damage for other markets like equity markets and emerging markets as well, has the situation reached to that point?
A: ‘Collateral damage’ is a pretty strong term. It is worth to take a step back and look at this event. We are focused on gold because it has gone through the biggest correction over the last couple of days but all commodity markets have been sold off. This is a sell-off that we have seen in metal markets, the industrial metals as well as the precious metals.
In the last four-five years, you have seen corrections around April-May. This is because trade flows tend to weaken in April-May, the biggest flow in raw materials have already occurred in Q1. So, we pass through an inflection point and that undermines the trade flows and price signals tend to correct around this time.
There is a second inflection point during the calendar year and that is around September-October. That is another correction we should be aware off. It is an event that happens every year. Also, there are commodity markets that have not been influenced by this. Metal markets are buckled in the last few days but the bulk markets have held up extraordinarily well. This is because they physically backed trade, they have poorly developed indices and forward markets, so they are mostly physical and reflect their physical trades.
Q: Crude has fallen, it has almost been a steady decline as compared to gold but is down to double digits on Brent, what kind of downside risk do you see there?
A: We are more fundamentally biased for the Brent than WTI (West Texas Intermediate). The outlook for Brent would be dependent on Europe and the economic outlook of Europe has been fairly subdued, the Europe-centric oil price, but that to some extent reflects the outlook that some in the oil market feel for China. China’s trade is potentially a little bit under pressure at the moment, they printed a 7.7 gross domestic product (GDP) number which has disappointed the trade and that has factored into weaker Brent price.
WTI on the other hand, below price signal USD 89-90 at the moment in the US market reflects more surplus of oil that exists in that market rather than any change on the demand side of the trade. Both the markets are under a lot of pressure and because they have forward and index based markets, they are likely to sell-off just like the metal markets.