The Hindu Business Line : Exit strategy must in volatile commodity market

Prospects
Physical demand is seen providing a solid footing for gold price.
Lead market has the potential to spike up to $ 4,000/t.
Zinc has the potential to rise to $3,200/t.

G. Chandrashekhar

Mumbai, Sept. 30 Overall, as global growth outlook becomes increasingly tilted towards commodity-intensive developing nations (China and India, for example), the fundamental outlook for commodities is turning increasingly positive for most sectors. Energy, metals and select agri-produce (mainly, feedstock for biofuel) are the ones to watch.

Currency factor

Currency is another factor. The dollar is weakening rapidly and there is widespread expectation of a further fall. Most commodities are priced in dollars. Dollar weakness serves to enhance the positive price trend anticipated in many commodity markets in coming months.

According to experts, in the short-term, weakening dollar will encourage the buying of certain commodities as a dollar hedge by investors acting on the historically negative correlation that many commodity prices display with the value of the dollar.

Longer-term, a weak dollar has real positive effects on commodity fundamentals as it reduces the earnings of commodity exporting countries, squeezes the profits of non-US producers and offsets the effect of high dollar prices for non-US consumers.

It is in this background that one must approach commodity investment. It is absolutely necessary to have the “exit” strategy in place, as the market remains volatile.

Positive determinants

Supported by continued dollar weakness and buoyant oil prices, gold has continued to retain its upward momentum. Key price determinants are turning increasingly positive even as market conditions are favourable to the yellow metal.

Fundamentally, despite relatively higher and lately rising prices, physical demand has made a remarkable comeback. It looks like consumers are getting used to higher prices, while investors expect to gain from further price spikes.

Physical demand is seen providing a solid footing for prices. Two major Asian economies (India and China) with impressive economic growth continue to influence physical buying. There is also rapid build in ETF positions.

These far outweigh the two bearish factors, namely a slowdown in producer de-hedging and pick up in central bank sales.

On the other hand, external factors such as stronger USD/euro (already trading above 1.40), buoyant oil prices and the sensitive geo-political environment are highly supportive. Foreign exchange strategists remain bearish on the dollar, going into fourth quarter, even after the sharp decline in the third quarter.

Importantly, expectation of a slower US growth momentum and further Fed rate cut easing have the potential to drive prices to fresh 28-year highs.

Analysts are already revising their price forecast for the last quarter of the year. For instance, Barclays Capital has revised upwards the fourth quarter gold price forecast to $750 an ounce on an average.

Consolidation

Technical analysts assert that in the near-term, there will be range trade and there will be consolidation at the very least. However, it does not preclude the risk of a deep correction. A dip below $720 may set up a deeper correction to $700/710. It may be advisable to buy on dips as the market is anticipated to run towards the $850 mark. Tight conditions are expected in most base metals markets this year and into 2008. Copper and lead have the strongest upside potential over the next three months. Copper and tin are expected to show marked price performance in 2008.

Copper at risk

Specifically, copper is at the risk of considerable fundamental tightening, with raw materials market tight, inventory levels low and the prospect of a big pick up in Chinese buying before too long. In the fourth quarter, copper may see average price of $8,000 a tonne. In the near-term, further price gains from the current levels are seen imminent, with the metal possibly surging to $8,400/t in the coming days.

Lead fundamentals are strong. Significant production losses hamper supply growth, while downtrend in LME stocks continues and the market moves into a strong demand season. Although prices fell back slightly below $3,400/t, the market has the potential to spike up to $4,000/t.

Aluminium uninspiring

In zinc, strong demand and tightening short-term physical supply (particularly in Asia) is supporting the move higher. Prices can potentially rise to $3,200/t. Aluminium market fundamentals are not inspiring. Range-bound trading may continue.

More Stories on : Commodity Markets | Investments

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Govt spend on rural job scheme below half-way mark

Corporates burn their fingers in wheat as prices rule flat

Where the pvt trade bought its wheat from

Late rains to aid early rabi sowing

Cos rushing to get telecom licence

Rising rupee, escalating worry

Are we catching them young enough? ask fund houses

Reliance Power public issue soon

Today's Pick: Great Eastern Shipping (Rs 337.35)

Northbound journey may continue

Exit strategy must in volatile commodity market