ON FIRM GROUND

Over the past decade, commodities have evolved into a unique asset class that is difficult to ignore. The recent boom in the commodities markets has given rise to a new class of investors who bet singularly on price movements in commodities. Commodity prices tend to follow the cyclical pattern of underlying commodities which is why it is important to understand the demand-supply factors. Kiran Kabtta Somvanshi & Abhineet Singh help you find out the best commodities where you can invest this year.

Precious Metals
GOLD
The bull-run in the yellow metal, which has emerged as an intrinsic part of the portfolio of investors after a global financial crisis in 2008 is expected to continue in 2011. The ongoing uncertainty on the global economic front and growing investment demand to hedge risks strengthen the case for higher gold prices. Gold has provided returns of 25% in 2010 in the wake of the sovereign crisis in Greece and Ireland. The trend is likely to continue, given the weak economic scenario in other countries in the region. Although the US economy is expected to recover in the later half of 2011, the US dollar is expected to remain weak until then which could support higher gold demand.

SILVER
Silver has outperformed most commodities in 2010. It is expected to keep pace in 2011 as well. Silver has a higher industrial usage compared to gold. It is used in dentistry, photography, electronic motherboards and pharmaceuticals. Silver reserves are fewer than gold and are depleting faster. Unlike gold, silver is not recycled because of its much lower value. In a way silver is like petroleum – once consumed, it’s gone forever. Many analysts anticipate the gradual return of a more robust economy in 2011. As manufacturing and production increase, the industrial demand for silver should go up as well. The increased demand and limited supply may help the price of silver per ounce grow faster than gold in 2011. Base Metals

COPPER
Copper is expected to be the best performer among several other base metals due to a demandsupply mismatch. The launch of financial products with copper as the underlying, higher and weak dollar may lead to all-time high prices of copper in 2011. Copper inventories on the London Metal Exchange fell by 30% in 2010, marking a low since October 2009. According to the International Copper Study Group, there will be a deficit of 435,000 tonne in the metal in 2011. The introduction of an exchange-traded product with copper as the underlying will put added pressure on supply. All this indicates a boom time for copper.

ALUMINIUM
Aluminium has been trading in a tight range and is expected to remain in that range in 2011. While demand has improved, so has supply. But the price of the white metal could find support considering the rising risk appetite of commodity traders and a weaker US dollar. Gains, however, would also be capped due to increased supply. The downside risk for aluminium is limited since prices are already near the marginal cost of production in China due to the increased power tariff. The New Year can be the year of consolidation for aluminium with a slightly upward momentum. Agro Commodities

SUGAR
Sugar prices are likely to remain volatile for at least first three months of 2011, as the crushing season is yet to conclude in the top two producing nations Brazil and India. During the quarter ending December, sugar prices at 28 per a kilogram were favourable for the domestic market with a year-on-year increase of 10 %. It was due to the downward revision of sugar production by one million tonne to 24 metric tonnes for the current sugar season (October 2010-September 2011) against the consumption of 23 metric tonnes by recent industry estimates. International raw sugar prices have also inched up due to the 28% drop in sugarcane production in the current sugar season of 2010-11. In the long-term, the outlook for sugar prices looks promising as the next sugar season (October 2011 to September 2012) would be a deficit year again due to its cyclical nature.

SOY OIL
Soy oil was one of the best performing commodities in 2010. This agro commodity is likely to extend its gains during the better part of 2011. Soy oil futures on the Chicago Board of Trade in the US logged gains of 35% last year. Indian refined soy oil futures have also tracked international prices. Despite the bearish fundamentals of higher inventory in the domestic market, the bullish price outlook of the US soy crop and heavy buying from China and rising palm oil futures have provided a fillip to the prices of edible oil in the Indian futures market. The next sowing season in June 2011 will provide further price pointers. They are likely to remain firm until then.

Energy
CRUDE OIL
Global crude oil prices have moved in the range of $85-95 per barrel recently, after staying range-bound at $75-85 for nearly a year. Apart from the weaker US dollar, the demand recovery in the western countries — both due to economic recovery and a cold winter —contributed to this increase. The forecasts for economic growth as well as oil demand have been raised for 2011. Crude oil prices are expected to stay on a steady growth path in next few months provided the economic growth keeps pace with demand growth. A steep runup in prices is, however, unlikely, considering its impact on the still fragile recovery process across the world’s leading economies.