CLSA not convinced by rally in oil and gold

GREED and fear report says oil surge due to Saudi Arabi and Russia suggesting oil output freeze

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Investment guru and CLSA Managing Director Christopher Wood has cautioned against getting carried away by the sharp rally in crude oil and gold. He starts his popular 'GREED & fear' report saying, "Trend reversals can be violent and financial markets are acting like there has been one."

He said this in connection with crude oil rally which has seen a 47% recovery to $41 per barrel from January lows.

"The oil rally is based on growing expectations that Saudi Arabia and Russia will agree on a production freeze. GREED & fear has been sceptical hitherto about the long-term sustainability of such a deal on production. Still there is no doubt that the oil price is acting like a deal could be in the works," said Wood.

In fact OPEC is likely to meet on 20 March to discuss oil issue wherein Iran is not agreeing to production freeze and some nations have already said that had there going to be no agreement then no point of attending the meeting.

His logic is that Saudi has short term motive to see higher oil prices as it is launching $5 billion international bond issue in June before the start of the Ramadan which will get good response if oil price stays high. However post that issue production decline is doubtful.

"GREED & fear would use the opportunity provided by the bounce in oil to put a short on the Saudi currency for those who have not already done so, since the cost of the hedge has declined significantly," he said in the report.

It is not only Saudi's motive, Iran which recently came out of sanctions regime has oil to sell after a long time to get dollars. Chris highlights another point saying, "the other part of the rally has, of course, been driven by anticipation of the normalisation of American monetary policy," which may help stabilise dollar denominated commodities.

French investment bank Natixis however says in latest note that, "Demand for oil product has started rising and hence that will provide support to oil. Although oil demand has not seen such improvement."

Like Oil, Wood is also not convinced by the rally in gold. From December lows, gold prices have recovered nearly 25% and now around $1,270 per ounce. CLSA's issue is that the rally in gold is only due to sharp increase in demand from investors of ETF. In last two and half months largest ETF US SPDR has seen a demand for over 160 tonnes or over 25% increase. Another reason for rally is short covering from record high short positions in futures.

Wood says, "For real conviction that gold is in a new bull phase it would be good to see either the Fed reverse course or inflation surge. The latter is clearly not yet happening while the Fed is still hoping it will not be forced into an embarrassing U-turn."

He has better conviction in gold mining companies share price rally as a measure for gold rally continues or not. The fact remains that gold has not seen demand from major consumers like India and China in last two months. In India demand however in March quarter may not even cross 100 tonnes.