Major non-farm commodities to take guidance from Dollar in new Samvat

Strengthening of the dollar the past few quarters has pushed investors to sell risky assets and shift to the greenback and oil

All major non-agri commodities in Samvat 2079 are expected to take guidance from the dollar, and their prices will move accordingly.

The strengthening of the dollar for the past few quarters has pushed investors to shift to the American currency and oil while selling other risky assets.

A rising interest rate, along with inflationary pressure, was the major trigger.

These traditionally are considered not good for commodities.

Gold is considered the best hedge against inflation except when the dollar strengthens.

In the just concluded Samvat, the dollar index was up 19.3 per cent but the rupee depreciated only 10 per cent against the dollar. But even the 10 per cent fall has resulted in prices of imported commodities causing inflationary pressures.

Except for resource commodities like oil and coal, other major ones saw a sharp fall in Samvat 2078. It was driven largely by the strengthening of the dollar after inflation started climbing following the Russia-Ukraine war.

Commodities have fallen between 6 and 50 per cent in Samvat 2078.

The interesting part is that in the previous Samvat year (2077) most commodities except gold and silver had given strong returns from 28 to 120 per cent. As a result, over two years a majority of the key commodities are still higher, again except gold, silver and iron ore, while steel has been marginally down.

While prices of crude oil and agri commodities went up after the Ukraine war broke out, it had a big inflationary shock and all central banks started raising interest rates.

Crude oil is still 12 per cent higher despite the steep correction in the past couple of months. Coal has been the best performer for its own reasons.

Gnanasekar Thiagarajan, co-founder and chief executive officer, Commtrendz Risk Management Services, said: “Commodities have had a very volatile few months since the Fed decided to stage war on inflation. Inflation rose to a 40-year high, which has made it resort to back-to-back hikes, and as of now, there is no economic data to suggest the rate hike cycle could end. Non-agri commodities like bullion, energy and metals have been hammered a lot. Agri commodities too got the stick but not as much as non-agri commodities. It is tough to pick a bottom now when the dollar is trending higher and one way.”

Gold, which benefits when the inflation rate rises, has also fallen due to rise in interest rates and a strengthening dollar. In Samvat 2078, international gold prices fell 6 per cent and silver 17 per cent. However, in the past six months gold has fallen by over 15 per cent.

Nigam Arora, a US-based algorithm trading analyst and author of the Arora report, said: “Gold has two problems. The first is the dollar, in which gold is priced. For this reason, when the dollar goes up, gold goes down. The dollar has been very strong. Expectations are for the dollar to stay strong.”

The second issue, according to him, with gold is that it “does not perform well when interest rates are rising. Investors may want to keep an eye on Fed funds futures. May Fed funds futures are hitting 5 per cent. What gold does will depend on where the Fed funds rate goes”.

This means when the Fed funds rate starts going down, gold is positioned for an explosive rally. However, as of now the signal is that the US Fed has only indicated reducing the speed of rate hikes.

As far as crude oil is concerned, US President Joe Biden has announced another big release of oil from the country’s Strategic Petroleum Reserve.

The irony is that whichever international commodities or assets one is trading in, one is trading in dollars. The dollar index had seen a high of 120 two decades ago. Now again, the market is expecting the dollar index to see that level. As of now, for the past few weeks the dollar index is trading at 112-113.

The dollar strength has seen funds exiting riskier assets and cutting positions in other assets. Gold has broken strong support levels internationally and is headed for the worse, said experts. Silver, though it follows gold, could fall less because it is already undervalued.

Gnanasekar said: “Metals are not likely to see any major turnaround till any clear macro economic signals emerge on the demand side. Energy prices are being held tightly in a range with both positive and negative factors but the negatives outweigh the positives currently.”