The weakness in commodities experienced yesterday was a short-term profit booking rather than any structural problem, believes Tom Price of UBS Equities.
Widespread rumours of a large commodity hedge fund being forced to liquidate its holdings triggered a broad sell-off in industrial commodities led by crude oil yesterday. "We have been trying to investigate the so-called rumour about hedge fund all day and have not found any sort of evidence for that at all," says Price.
Price maintains its bullish stance on the world commodities market. "The fundamentals in commodities trade look reasonably sound and there are no structural problems in any of the economies around the world that could justify this sort of shocks," he adds.
On expectations of gold levels, Price sees the yellow metal at USD 1500 per ounce before any direction from the US Federal Reserve in the days to come. According to him, the worst case scenario could be with the marginal cost of production for gold at about USD 1,100 per ounce.
Below is the edited transcript of Price's interview to CNBC-TV18.
Q: How much of the weakness in commodities we saw yesterday was because of the rumour about a hedge fund selling off large amount of commodity exposure and hw much of it was on fears about the outcome of the Federal Open Market Committee (FOMC)?
A: We have been trying to investigate the so-called rumour about hedge fund all day and have not found any sort of evidence for that at all. I would say there is panic across the market looking for any reason to selloff in a market that has done pretty well year-to-date (YTD). So, I think we could probably describe this event as a short-term profit taking event. The fundamentals in commodities trade look reasonably sound and there are no structural problems in any of the economies around the world that could justify this sort of shocks. So, it just looks like a profit taking event at this stage.
Q: How would you rate the weakness in gold? Is it likely to go down further even below USD 1,550, say in the next quarter?
A: That is a very good point. In commodities, gold has really been floundering around USD 1,600 an ounce for the first few months of 2013. What is really hurting gold is the strong, steady macro economic data coming out of the US which, ofcourse, creates upside risk for the US dollar and a scenario like that is bearish for gold.
What it suggests, is that the quantitative easing programs that the US Fed is presiding over which are potentially inflationary, could be cut. That means that primary driver inflation is just not there to support the gold price.
Q: What are the levels you would look at?
A: There are extreme scenarios where it has backed off to USD 1,580 an ounce. An absolute worst case scenario is the marginal cost production that usually what I think about for each commodity and the marginal cost of production for gold is about USD 1,100 an ounce, so that is a end of the world scenario for that commodity itself, a USD 400-500 an ounce fall, but I would say what is more than likely going to happen is that it will back off and hold at levels of about USD 1,500 an ounce and wait for new directions from the US Fed over the coming weeks and months. So there are two scenarios, a worst case scenario and something of a short-term stability looking for US Fed direction.
Q: Do you think the panic selling that we saw in commodities yesterday is over? Can we expect a bounce or perhaps stabilisation? What will be the short to medium-term outlook on where the commodities are heading?
A: Whenever you see these sorts of corrections occur in a market where the backdrop has not really changed that much, there is nothing deeply wrong with currency trades. In this case, the macroeconomic outlook for all the key commodity consuming regions like the US, Europe and Asia look stable. They really are buying opportunities and one of the things that is interesting is that these corrections occurred at a time when metal trades are actually typically quite buoyant. We are right in the middle of restocking season for copper, iron ore and coal and that is a China-led event. So, in commodities like the bulks and copper, over the next three or four months, we see some upside there.