Gold slips nearly 20% since March; may come under pressure on strong dollar in 2015

By Priti Gupta

It was a particularly lamentable year for commodities, especially for gold and crude. After a strong start to the year, both these commodities came under severe pressure during the second half of the year.

Gold topped out in March and steadily grinded lower, losing nearly 20% since then, undermined by strengthening dollar, surging equities, and receding global inflationary pressures.

On the other hand, crude oil topped out in June and virtually collapsed thereafter, losing nearly half of its value since then, pressurized by rising output from major oil producers (Russia, Saudi Arabia, and the US), expectations of slowing demand from key oil consumers (China, euro area, and Japan), and the dollar’s relentless strength.

Looking into 2015, the focus would be on when the Fed starts hiking interest rates. At the present pace of recovery, market participants are bracing for the Fed to normalize rates by mid-2015, possibly in June. Much, however, will depend on how data from the US emerge in the next couple of months.

If they show a faster pace of recovery, traders could start pricing in a sooner rate hike, which could send the dollar further higher. This could take a toll on gold early next year and possibly drag the metal towards $1,050.

My advice to those investors who do not have any gold in their portfolio, is to add gold upto 5% of their portfolio in 2015, since it will be a value pick. Gold prices will bottom out and are likely to remain at the support price of around $1050 in the coming year. Also, it remains to be one of the most liquid assets hence, provides for a safety net in case of emergencies.

However, while investing into gold one needs to be extremely discerning on the mode of investment. Deliverable gold on exchanges, ETFs are most investor friendly tools to buy gold.

However, if the US economic recovery decelerates, the likelihood of a June rate hike would cool down. If this is also accompanied by the European Central Bank delaying its monetary stimulus early next year, the dollar could come under severe selling pressure. This could prompt shorts-unwinding and lift gold towards $1,300.

Focusing on crude oil, much will depend on whether the markets are able to balance themselves out. For this, there has to be a slowdown in global oil production and a pickup in global economic recovery.

Recent comments from key OPEC officials, however, suggest that the bloc wants to increase its market share and avoid any production cuts.

As such, it looks likely that if there are any cuts in the months ahead, it would most likely have to be from non-OPEC nations, especially from unconventional producers.

Any slowdown in output, we feel, is likely to prevent prices from slipping further. If this is also accompanied by improving economic conditions in key oil consuming nations, then prices could return back towards $80-85 (WTI oil) in 2015.

(The author is Executive Director - Commodities & Currencies, Anand Rathi Financial Services)