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Bouts of dollar weakness and constrained mine supply, among other favourable external factors, are likely to support investor interest.

G. Chandrashekhar

Mumbai, Aug. 24 Across the board, commodity prices have moved indiscriminately in recent weeks, raising debates over the basic causes of such volatility. Belief is now gaining ground that worsening of short-term sentiments, about the global economy in general rather than market-specific fundamentals, may be driving these movements.

Of interest to investors should be the observation that the economic slowdown currently confined to the US and other major industrialised countries may move to the rest of the world. This expectation is what drove the US dollar considerably higher against other currencies, which had its impact on the market.

Gold market, which was under tremendous downward pressure until very recently, saw huge volatility last week and prices bounced back smartly. In addition to resurfacing of physical demand at lower prices (below $800 an ounce), the yellow metal gained traction as the external environment evolved favourably with the dollar weakening, oil prices climbing higher amid geopolitical tension.

In London, on Friday, the PM Fix was $824/oz versus previous day’s $833.50/oz. AM Fix for silver was $13.62/oz, up marginally from Thursday’s $13.59/oz. Going forward, a fall to around $800/oz is sure to get strong buying support from gold bulls and could cushion the downtrend. In the short-term, gold prices are likely to continue to be at the mercy of dollar movements and oil prices. Bouts of dollar weakness and constrained mine supply, among other favourable external factors, are likely to support investor interest, which remains a key determining factor, according to experts.

Base metals rallied last week in the international market on the back of heightened concerns over supply (zinc and nickel in particular) and appreciation of the US dollar, which resulted in significant short covering. Nickel, lead and tin all ended the week more than 11 per cent higher, while zinc rose 8.4 per cent and copper finished the week up 4.4 per cent.

It must, however, be asserted that although prices have recovered a little, the market sentiment remains weak. Expectations of economic slowdown moving beyond the US borders are underpinning prices. A clear pick up in the physical activity is necessary for the prices to find the momentum to go higher in the short term.

Specifically, experts assert that in nickel and aluminium further downside looks limited, with prices close to marginal costs, while tin and copper prices should be supported by low inventories and poor supply-side performance. Zinc is the metal with the biggest downside potential as stocks are rising, demand is weak and supplies continue to grow rapidly.

Lead prices have the potential for a short-term recovery with Chinese lead output at risk from extended maintenance and cutbacks. As for tin, the recent flow of fundamental data has been strong. It is a metal that could stage a price rally, even in the current uncertain macroeconomic environment, assert analysts.

Last week saw prices rise strongly, erasing most of the declines experienced over the previous two weeks in what was seen as overdone correction. On Thursday, the front-month WTI contract rose by over $6 to close at $121.18 a barrel, its highest level since August 4. The move was influenced by the US dollars retreat and diplomatic tensions between the US and Russia.

From a fundamental point of view, current and projected market balances indicate continued tightness ahead. This is likely to underpin prices. Crude stocks remain low globally and no major inventory build up is likely in the near future. Demand continues to remain robust particularly in Asia, despite weakness in OECD area.

Prices may be expected to trade in a wide range of $110-130 a barrel for the rest of the quarter. According to analysts, little spare capacity across the supply chain, uncertainty over the macroeconomic outlook and lack of consensus over the long-term equilibrium price for oil are factors pointing to continued high market volatility.

More Stories on : Gold & Silver | Outlook

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