Commodity, Debt and Currency

This is the most comprehensive comparison that can be drawn between the current trend in the prices of major commodities (like gold, crude, copper and aluminium), yield on 10 year Government Securities and, Indian rupee - US $ exchange rate.

The exchange rate just cleared the highest mark in the last eight months and is probably on a slight downward swing. Prices of gold, copper and aluminium has slashed down considerably; the volatality being the highest in gold price. The yield on 10-year government bond is also at the lowest point in the last eight months.

If we look at the gold price fluctuations then we see that in every four months during the last eight months it has progressively increased, peaked and then went down again; this was almost cyclical. If the same trend (or cyclicity) continues then it is the right time to invest in gold as it is expected to go up and peak in another four months' time. As the world demand for gold has absorbed quite large quantities of Central banks gold stocks over the past decade, with only a fairly small downward effect on prices, we believe that gold prices are more likely to increase over the next few years than to decrease. Certainly the upside potential must now be considerably stronger than the downside potential.

The decline in copper and aluminum price is expected to be reflected in lowering of prices of finished goods using these metals as inputs (such as auto-ancilliaries). The fall in crude oil prices would definitely be a sigh of relief for the oil refining and retailing companies like IOCL, HPCL, etc. The depreciation of Indian rupee against US$ would definitely benefit the exporters on one hand, but would have adverse effect on the importers.

A basic property of a bond is that its price varies inversely with yield. The reason is simple. As the required yield increases, the present value of the cash flow decreases; hence the price decreases. Conversely, when the required yield decreases, the present value of the cash flow increases; hence the price increases. In the current scenario a declining bond yield would result in rise in its price.