Commodities Perspective - Normalization of its balance sheet, the new agenda for US FED: Angel Commodities Broking

Views by Mr. Prathamesh Mallya (Chief Analyst - Non-Agri Commodities & Currencies, Angel Commodities Broking):

"The US FED has hiked its interest rate by 25 bps the fourth of its kind since it first hiked rates in December 2015. It also signalled one more rate hike in 2017 followed by another three rate hikes in 2018. Fed chair Janet Yellen also spoke about normalization of balance sheet size of the $4.2 trillion relatively soon.

What this means for commodities? It clearly means that the extra liquidity which was infused by the FED for so long will no longer be there in the system as they prepare for gradual unwinding of the balance sheet.

This means, gold and silver will no longer be an attractive investment in a scenario where US economy is gaining momentum while crude oil has its own set of complex factors ranging from high inventories, OPEC compliance on output cut, increasing rig count in the US leading to higher production and the factors alike, pushing down oil prices which currently trades at $45 for WTI and $47 for Brent.

On the other side, one thing has to be noted that the surplus cash generated by oil producers from high oil prices is invested somewhere in some part of the globe. In a scenario, wherein the central bank talks about sucking liquidity from the system and lower oil prices spells trouble for commodities as an asset class to generate higher returns.

For the time being, let's go with the trend, gold prices will head lower in the near term towards $1220 while on the MCX, gold futures can possibly move lower towards Rs.28000/10 gms. Oil prices WTI $45 will move lower towards $41 while on the MCX, oil prices can move lower towards Rs.2750/bbl, while the supply disruption story will continue to support copper prices, all the other base metals will have their own fundamentals for further price direction."

Source : Equity Bulls

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