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Will returns from commodities like gold, pepper improve?

Will returns from commodities like gold, pepper improve?

We analyse how five commodities that have given the highest returns in the last five years are likely to perform in the future.

They are a good way to diversify your investment portfolio and earn decent returns. Consider this: Quite a few precious metals and agricultural commodities that are traded on exchanges have returned over 160% between September 2006 and September 2011.

There are around 21 commodities that are being regularly traded on the National Commodity and Derivatives Exchange (NCDEX) since September 2006. Of these, guar gum, gold, silver, rubber and pepper have given over 20% annual return since then. We will discuss factors that drive these commodities and their price outlook.


Guar Gum
Guar Gum: The commodity has been the top performer in the last five years. It has surged over 220% since September 2006 and was at Rs 14,458 per quintal in September 2011. Guar gum is made from guar seed, whose production has been falling over the last few years due to unfavourable weather.

Guar gum is used as a thickening and binding agent in food, textile, paper, oil and pharmaceutical industries. Highly refined guar gum is used in the food industry as a stabiliser in ice creams, as a meat binder and a stabiliser for cheese, instant puddings and whipped cream substitutes. It also has industrial applications, including for making cloth and paper.

Guar seed is a monsoon crop which requires good rain initially and dry weather after sowing.

Due to poor rainfall in the growing areas, guar seed production fell from 110 lakh bags (one bag equals 100 kg) in 2007-08 to 40 lakh bags in 2009-10. The carry-forward stock has been falling steadily, one reason for which is exports. In 2004-05, the carry-forward stock was 64 lakh bags, which fell to 24.7 lakh bags in 2009-10.

The Performance
"In calendar year 2011, good rain has been a boon for the growers. We are not very optimistic about guar seed and guar gum prices as we expect a bumper crop. One may see guar gum test the Rs 12,500 per quintal level in the coming months," says Kunal Shah, head, commodities research, Nirmal Bang Securities.

Guar seed production saw healthy growth between 2005 and 2008. It fell in 2009-10 due to an adverse weather phenomenon called the El Nino, triggering a price rally. The price rose 86% between 2009 and 2010 and was Rs 6,290 per quintal on December 31, 2010.

"We expect moderate returns of 15-20% in 2012. However, expectation of bumper crop in Rajasthan can cap the upside. The commodity will not be an outperformer next year. Technically, we feel guar gum can find strong support at Rs 14,000 per quintal and thereafter at Rs 13,000 per quintal. We feel Rs 15,500 per quintal should be a good resistance level," says Shah.

On September 30, 2011, guar gum was at Rs 14,458 per quintal, while guar seed was at Rs 4,575 per quintal. Ruchi Jain, economist, NCDEX Institute of Commodity Markets & Research, says, "Any delay in moving goods, the government's intervention in the market and developments in user industries get reflected in prices."

Silver: Silver beat gold, its cousin in the bullion category, between September 2006 and September 2011 by surging 192% to Rs 50,937 per kg, giving an annual return of 23.88%. Gold, on its part, gave an annual return of 23.7% during the period.

Market experts say silver has gained from the spectacular bull rally in gold during the last 10 years. Being less expensive, investors and traders bought it in large quantities, expecting the same scintillating returns as gold.

However, between April 25, 2011, and September 30, 2011, it fell 30% to Rs 50,937 per kg. "The recent fall has hit demand and prompted MMTC, a government canalising agency and the largest importer of silver in India, to lower its import forecast by 20%. The recent fall should bring demand back," says Anand James, chief analyst, Geojit Comtrade.

"The prospects for the year-end are better. The metal could give a 30% annual return by the end of this year," he says.

Gold: Buoyed by investment and jewellery demand, gold prices rose 190% to Rs 25,951 per 10 gram in the five years till September 2011.

"Strong global demand, especially for jewellery and fabrication, along with buying by central banks, was behind the rise, while supply lagged till 2010," says Aurobinda Prasad, head of research, Karvy Comtrade.

Experts say the debt crisis in Europe and the fear of the US slipping further into recession are driving investors to safe assets such as gold.

"Expanding risk awareness has increased market sensitivity and lowered the risk appetite. Consequently, there has been an increase in allocation to gold by central banks, institutional investors and retailers alike, who are seeking to protect the value of their money," says Lakshmi Iyer, head of products and fixed income, Kotak Mutual Fund.

"Negative real interest rates and US Fed's low interest rate policy are likely to keep gold prices high. We believe an annualised return of 15-20% is possible," says Prasad.

According to the World Gold Council, the demand rose 10% to 3,971 tonnes in 2010 from 3,618 tonnes in 2009. However, the supply was up just 2% to 4,155 from 4,081 tonnes in 2009, indicating possible rise in prices.

Rubber: The commodity has given an annualised return of 22% between September 2006 and September 2011. However, since the beginning of financial year 2011-12, the price on the National Commodity and Derivatives Exchange has fallen over 9%, or Rs 2,239 per quintal, to Rs 20,911 per quintal on October 3, 2011.

"The demand was hit by good production and bleak outlook for global growth. Successive rate increases in India and China to curtail inflation lowered demand in the two largest consumers," says Anand James of Geojit Comtrade.

Ajitesh Mullick, assistant vice president, agri research, Religare Commodities, seconds him. "The rise in global production and apprehensions about global economic slowdown leading to lower demand have affected the market sentiment for rubber," he says.

The Money Spinners
In the domestic market, the demand for natural rubber has been exceeding supply. In 2009-10, production was 8,31,400 tonnes, while consumption was 9,30,565 tonnes. In 2010-11, India produced 8,61,950 tonnes natural rubber, while consumption was 9,49,205 tonnes.

In July 2011, the domestic production of natural rubber rose 7.17% to 62,700 tonnes compared with 58,500 tonnes a year ago. Consumption rose 7.61% to 82,000 tonnes compared with 76,200 tonnes in July 2010.

However, import of natural rubber rose to 20,127 tonnes in July 2011 from 17,975 tonnes in the same month last year. Exports grew to 779 tonnes from 24 tonnes during the period.

"Factors that can support the commodity are rain in major producing states such as Tamil Nadu and Kerala, global recovery and firm oil prices," says Mullick.

"By the end of the ongoing financial year, rubber can touch Rs 22,500 per quintal," says James.

Pepper: Pepper has given an annual return of 21% in the last five years. "Pepper futures have always been a favourite of investors. Between September 2006 and September 2011, investors, stockists and exporters bought on every dip, hoping for good returns. Production of pepper in major producer countries such as Brazil, Indonesia, Sri Lanka and India has been falling year-on-year," says DK Aggarwal, chairman and managing director, SMC Investments and Advisors.

According to the International Pepper Community (IPC), the production fell to 3,18,000 million tonnes in 2011 from 3,35,230 million tonnes in 2010. Production in all member countries of IPC, except Vietnam and Malaysia, is estimated to fall. The demand is growing consistently. Further, almost all carryover stock has been exhausted.

"Due to depreciating rupee and the upcoming winter season, the prices of pepper can touch a high of Rs 42,200 per quintal as winters are the best time for consuming pepper. Technically, the commodity can find strong support at Rs 30,200 per quintal and resistance at Rs 42,200 per quintal," says Aggarwal of SMC. On September 30, 2011, it was trading at Rs 34,755 per quintal.