Gold, Crude Rally Amid Iran-Israel Tension Sets Stage For Commodities' Comeback

Commodities are back after a year of decline, led by a surge in precious metals and oil prices, owing mostly to geopolitical tensions and the anticipation of rate cuts by central banks. The gauge that tracks global commodities, the Bloomberg Commodity Index, has risen nearly 5% so far this year, compared to a 10% contraction in the previous calendar year.

The rally in precious metals like gold and silver, which have increased by 16% and 22%, respectively, is primarily responsible for this.

The rally was mostly led by the tensions in Middle Eastern countries and the need for investors to park their money in safe-haven assets, according to Ajit Mishra, senior vice president of research at Religare Broking. "Though the interest rates are on the higher side, the participants are hoping that maybe in the second half there will be rate cuts that would further enhance the shine for the precious commodity."

The stability of the Chinese economy is another factor pushing up commodity prices, Mishra said.

Tougher US sanctions on Russia, and Iran entering the Middle East conflict are the major risks to commodity prices, Emkay said in an April 14 note. "Crude is already in the 90s, and the Bloomberg Commodities Index is up 8% from Feb. 3," it said.

"This could impact margins, but the move needs to be much bigger to have a material impact. I don't see this as a material risk currently," Mishra wrote in the note.

While 2020 saw a decline in the index, the following two years saw gains in commodities. The current year will end on a positive note for the commodity market, but there will be corrections going forward, Mishra said. "I guess we have already seen a major part of the rally. There should be some pause or correction going ahead before any advance," Mishra said.

The index has the biggest weightage of 15.6% on COMEX Gold 100 Troy Ounces, followed by ICE Brent Crude Oil and NYMEX Light Sweet Crude Oil with a weightage of 8.09% and 6.27%, respectively. The index ranks COMEX Silver seventh, with a weightage of approximately 4%.

Among the indices, COMEX Silver rose the most year-to-date, with gains of 20.76%. NYMEX Light Sweet Crude Oil and ICE Brend Crude Oil followed with gains of over 19% each.

Bullion prices in India surged to a new high of Rs 72,931 as of April 12. On the Multi Commodity Exchange Ltd., gold futures for June delivery soared 3.23% intraday to hit a fresh high of Rs 73,958 per 10 gramme on Friday.

Morgan Stanley expects gold prices to go up to $2,300 per ounce in 2024, but price action is likely to be choppy as uncertainties remain over US data and rate cuts by the Fed. Meanwhile, Christopher Wood, the global head of equity strategy at Jefferies, has expressed surprise at the lack of documented reasons for this significant rise.

Spot silver prices are trading at a record high in India, surpassing Rs 84,000 per kilogramme for the first time. It hit an all-time high of Rs 84,010 on April 12. So far this year, the metal has returned 13.41%.

Brent crude prices were trading above $90 a barrel, and WTI crude was above the $85 mark. "Near-term geopolitical risks, such as the potential for Iran to launch missiles on Israel, could provide a downside cushion to crude oil prices, with WTI crude oil prices projected to reach warningly high levels of $87-$89”," Riya Singh, research analyst of commodities and currency at Emkay Global, said in the note.