COMMODITIES TO BE BULLISH AHEAD

Rains are lashing Mumbai city and the commercial capital of India, is facing flooding in many areas and public transportation system is grappling to keep going despite the rains. Though this does not talk too highly about the infrastructure development of the city, it certainly is good news if the lakes manage to get sufficient water to quench the thirst of the city.

Though Mumbai is having a good rainfall today, the other states in India, especially Northern India is facing a tough time. Jharkhand today declared four of its districts as drought hit. The Met department is worried but not yet panicking. Revival of monsoon since July 8th has managed to reduce the deficiency from 46% to 33%. The Met Dept today stated that states of Madhya Pradesh and Maharashtra and Gujarat would get good rainfall over the next two days.

And in the midst of all these clouds, one thing shining brightly is the emerging truth that commodities might well turn out to be the 'next big thing'.

A deficient rain would mean lower agricultural production, meaning pressure on foodgrains and crops, which in turn means that prices would go up further. Unlike the stock market, where there are more downs than ups, the outlook is extremely bullish on commodities. If there is a drought, the prices will go up and if the rainfall in sufficient, production would be higher and that signals a positive for the commodities. We all need food, irrespective of a bull or a bear run. If there is a drought, imports will have to come in to feed us all. And once there is a bounce back in the economy, it is commodities which will be the first to see a jump. What happens if the downturn continues? People will still back commodities as the faith in currencies is slowly getting lost.

Take a look at the trend in China. In a bid to steer away from US dollars and stop putting all its reserves in the US dollars, China has been secretly stocking up on gold to diversify its vast foreign reserves. Usually, gold prices rise when dollar weakens and that is probably the trend which China, like the rest of the world, foresees in the future. Russia is another country which has been increasing its holdings of bullion.

Metals too will be the first to rise once the bounce back happens. Currently, the rally in iron ores is driven by China and its controversy with Rio Tinto. The three largest suppliers of iron ore in the world - Vael, SA, Rio Tinto and BHP Billiton are currently holding out to their cash sales to China to ensure supplies to customers in Europe, Japan and South Korea. Commodity experts say that demand and prices for Indian ore may increase should the Chinese state investigation discourage purchase of ore from Australia and Brazil. As per data put out by Bloomberg, China’s iron ore imports rose 3.4% in June to the second highest level this year. The shipments had hit a record of 57 million tons in April.

There are some murmurs in the corridors of corporate honchos that negative data from US came in at a time when it was essential to pull down the stock markets, timing it with the auction of the US Treasury Bonds last Wednesday. The usual trend is that people turn towards bonds when equities slip and in that auction, there was record demand for the bonds even as world over Govt's are having a tough time with bonds. The auction was three times oversubscribed, and this was the first time it had happened since 1994. But some time soon, US will realise that it is borrowing too much and that is the time which is feared by the currency traders.

Overall, the perception is that global stock markets would remain volatile, the dollar long term outlook does not look too good but outlook for commodities is bullish.