Chief commodity analyst of Smith Barney, Alan Heap, feels that the market is agonising over the interest rate outlook.
Heap believes that higher interest rates will have a more than normal, adverse impact on the commodity market because they will influence the investment flows in commodities.
He expects copper and zinc prices to fall by 20%. He believes that the macro environment, which is quite bearish for base metals is positive for gold.
Excerpts from CNBC-TV18's exclusive interview with Alan Heap:
What are you expecting to see in base metals in the next few weeks?
We have seen quite a reasonable recovery yesterday in London after some traumatic corrections over the last few days. There is no doubt that the market is extremely concerned about the outlook. Volatility is at record highs and at the same time, liquidity on the London Metal Exchange is at extremely low levels.
What the market is agonising over is the interest rate outlook. In this cycle, higher interest rates will have a more adverse impact on the commodity market than normally because they will influence investment flows in commodities. If one sees a withdrawal of investment flows from the commodity market, it will mean lower prices in the next few weeks.
Can you give us a perspective on how the steel markets behaved in the last one-month
Yes, steel prices have picked up quite strongly around the world in general, but especially in Asia, which is a consequence of strong demand.
Could you give us some indicative levels where prices may have reached after this pullback?
They vary a lot by region. It is difficult to give any specific benchmark prices.
How much weakness do you expect to see in copper and zinc?
Well, if we were to see a substantial exit by the investment fund, I think it is certainly possible that prices could fall by 20% from here.
What about gold? Do you think you have seen the worst at $540-550 levels?
We have looked at gold; it is a lot more constructive. The macro environment, which is quite bearish for base metals is positive for gold. Mounting inflation, higher interest rates, all that will drive investors into the gold market.
At the same time, the supply-demand fundamentals are constructive. Demand has been hit by these very high prices but that will come back with time. Also, supply is highly constrained.
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