Gold may not repeat 2020 performance unless virus situation worsens: Ravindra Rao of Kotak Securities

If vaccination progresses smoothly, it may dampen gold's safe haven appeal and investors may rather chose to invest in riskier assets like equities, commodities, Ravindra Rao, VP-Head Commodity Research at Kotak Securities said in an interview to Moneycontrol's Sunil Shankar Matkar.

He feels the overall outlook for gold remains bullish, however it may not repeat the 2020 performance unless the virus situation takes a turn for worse.

Edited excerpts:-

Q: Gold has given strong return of 23 percent in 2020. Do you expect similar kind of return in 2021 too, and why? What is your overall outlook on yellow metal? Also will the gold continue its outperformance over equities in 2021?

Gold has been rallying since 2018 and the rally exacerbated this year due to the pandemic which forced central banks and governments to undertake unprecedented monetary and fiscal measures to support their economies. With the huge monetary and fiscal expansion, concerns about inflation, currency debasement and debt defaults are increasing and this may give investors enough reason to remain invested in gold. The weaker outlook for US dollar on back of loose monetary policy stance and worsening virus situation also makes a bullish scenario for gold. However, in 2021, the key area of focus will be how soon a large population is vaccinated to help economies reopen and normalize. If vaccination progresses smoothly, it may dampen gold's safe haven appeal and investors may rather chose to invest in riskier assets like equities, commodities. The overall outlook for gold remains bullish, however it may not repeat the 2020 performance unless the virus situation takes a turn for worse.

Q: Base metals rallied sharply in past several months given the recovery in China and other counterparts globally, weak US dollar etc. Do you think the rally will extend in 2021 too and why?

2020 has been a year of bust and boom for base metals pack. Almost all the metals had plunged to multi-year low in March on the back of demand destruction due to coronavirus led lockdown in top consumer China and eventually rest of the world. Prices, however, noted a smart recovery as lockdown measures that had dented demand outlook started hurting supplies of the metals too – especially that of Copper, Zinc and Nickel. In second half of the year, pickup in demand from China along with revival in economic activity in other major consumers viz. US and Europe help lift prices higher. Prices also sought support from unprecedented monetary as well as fiscal stimulus announced by major economies to boost growth. More recently the rally across metals pack has been driven by hopes of rebound in global growth on back of progress on vaccination front along with weakness in US Dollar. As we enter the new year, most of the factors mentioned earlier are expected to keep metals pack supported in 2021. Rollout of vaccination is expected to boost revival in global economic activity which in turn would fan demand outlook for base metals. Further demand is also expected to rise from China as the nation is expected to grow at a healthier pace in 2021. Also increased infrastructure spending by major governments to support growth and expectation of shift to clean energy in US under Joe Biden's Presidency is expected to spur demand for metals like Copper, Nickel and Zinc.

While demand for metals is poised to grow; there remains uncertainty over supplies. Even though the vaccine rollout has commenced it is currently accessible to nations like US, Europe and China – basically top consumers of metals. It may take months before it is available to metal producing nations like Chile, Peru, Mexico, Bolivia, Indonesia, Philippines; which means there remains a threat of supply disruption from these regions in case of spike in cases as it would trigger re-imposition of lockdown measures.

Basis the above-mentioned factors we expect the bull run in metals pack to extend in 2021. Our top pick in the pack for 2021 would be Copper followed by Nickel and Zinc.

Q: Crude oil prices gradually climbed above $50 a barrel in December and sustained above the same level so far. Do you expect the commodity to hit $70-75 a barrel on the Brent futures in 2021 and why?

Crude oil has been late entrant to the rally seen across commodities. While crude rallied along with other commodities on back of huge monetary inflows, a large part of the rally came since November when progress on vaccine was reported. Crude has breached the $50 per barrel mark in expectations that demand may recover soon as vaccination may help bring the outbreak under control. The year 2021 is seen as a year where both demand and supply of crude is expected to normalise. If vaccination progresses well, demand may pick up pace however we believe that it will be months before vaccination targets will be reached and until then some form of travel restrictions may remain in place.

On supply side, OPEC and allies have already begun to reduce their production cuts. Higher price and hopes of demand recovery on back of vaccination progress may further incentivize producers to restart production. We are already seeing that US crude oil rig activity has risen to May 2020 highs pointing to higher output in coming months. So overall, outlook for crude has improved on vaccination progress however a sharp rally is unlikely as demand will recover slowly while supply may also come back online. Given the challenges both on demand and supply front, we do not expect crude prices to rise as high as $70-75 a barrel in 2021.

Q: What is your outlook on natural gas?

Natural gas has been on a rollercoaster ride in 2020 and with mixed factors in place, volatility is likely to continue. However the general outlook has improved. The recovery in Asian economies led by China and strong demand from Europe has pushed US gas exports to record high levels. With increasing emphasis on use of cleaner sources of fuel, demand for natural gas is likely to remain high. However, weighing on price is well supplied US markets. US gas production has recovered from lows while rising crude price may incentivize producers to increase production of crude and thereby associated gas. US gas stocks also stand at elevated levels and may weather any short term surge in demand. For a sharp rally in natural gas to materialize, we need continued growth in Asian and European demand and sizeable decline in US gas production.

Q: What are the key risks and positives to play crucial role in non-agri commodities in 2021?

The biggest factor to watch out for in 2021 will be how soon vaccination is done at such a large scale to help economies reopen and normalize economic activity. The long it takes to get the virus outbreak under control the greater will be the negative impact on the economy. Virus situation may also determine the policy actions of central banks and governments. A major factor behind 2020 rally has been bargain buying by China and we need to see if the pace of purchases continue at the same speed in 2021 as well. Also in focus will be UK-EU relation in the post Brexit era. While the trade deal has been signed, there are various contentious issues which could affect their dealings. US policy action under Biden administration will also be in focus especially US-China relations.