The Hindu Business Line : Firm trend in dollar hits gold; base metals slip

Mumbai, Sept 7 Commodity markets overall have become vulnerable in recent weeks in the wake of none-too-encouraging global macro-economic conditions. The latest OECD composite leading indicators have clearly signalled a serious slowdown in industrialised countries. Financial markets too are no exception. The pessimism has cast a shadow on the commodity market. Evidence of demand compression or demand destruction is palpable.

Strong $

With fears of a further downturn gripping the global economy (beyond the US borders), speculators holding long positions are exiting systematically, especially from sensitive markets such as gold. A firming US dollar has added to the slide in commodity prices.

In case of agricultural commodities, production prospects have considerably improved in major origins. Wheat and soyabean output is expected to bounce back, while corn and cotton may slip but still be large enough. Clearly, the speculative froth in the market is gradually disappearing and prices are returning to levels by and large justified by demand-supply fundamentals. No wonder, experts are now reworking their price forecasts for a wide range of commodities.

There is also the fear that the sharp downward correction may be overdone at some stage. In the event, investors can perceive value in some commodities, especially where the market fundamentals are rather tight.

Gold

The precious metals market continues to remain vulnerable to changes in the US dollar value. A firming dollar sent prices reeling below the psychological $800 an ounce recently. Interestingly, at this level a lot of buying interest is seen, providing support.

On Friday, in the London spot market gold PM Fix was at $808.50/oz slightly up from the previous days $805.75/oz. Silver eased slightly at $12.72/oz (AM Fix) on Friday versus the previous days $13.02/oz. Going forward, the yellow metal will be influenced by the movements of the greenback and inflation (in turn, crude prices).

Foreign exchange experts see a gradual strengthening of the US dollar vis-À-vis the Euro over the next several quarters. Should that expectation materialise, gold prices will be under pressure. Fed rate cuts are perceived to have bottomed out. In sum, if the dollar continues to retain its recent strength, it would keep gold prices under pressure. A steadily declining crude market too is seen placing a lid.

On the positive side, Indian demand will play a key role. A sharp pick up in physical demand, particularly ahead of the wedding season in India and a series of festivals followed by crop harvest are sure to support the market in the near term. Weakened rupee has of course partially neutralised the benefit of falling overseas prices. Every dip in price should provide a good buying opportunity.

Base metals

Surely, pessimism over global economic prospects is seen continuing to impact the base metals complex. On Friday, the entire base metals complex was down sharply, with copper leading the way. Copper dropped 4.6 per cent to $6,929 a tonne in large part owing to a 10 per cent (18,775 tonne) increase in LME stocks to 200,875 tonnes, to their highest level since January 2008.

Total LME copper stocks were up 27,500 tonnes or 15.9 per cent over the week and prices fell by 8.2 per cent. Lead, tin and nickel saw falls of similar magnitude. Copper could however stay well supported in the last quarter of the current calendar when China is expected to return to the market. Some experts assert that in the short term copper prices could be around $7,400/tonne; while aluminium may average $3,100/tonne in Q4 due weaker Chinese demand; and rally by 10 per cent going forward into 2009 due continued supply constraints. Tin whose fundamentals are strong may register an average of $22,000/tonne in Q4. Nickel prices could recover modestly with a price forecast of $22,500/tonne, and weakening by about five per cent going forward into 2009.

Crude

Oil has gone under renewed selling pressure in the absence of major infrastructural damage to oil facilities in the region where Hurricane Gustav was slated to pass through. It is surely a bearish signal. On the NYMEX, oil has slipped well below the psychological $110 a barrel. Further downside remains possible until the recent wave of weak US oil demand data and deep macroeconomic pessimism runs its course, commented an expert. It is as yet unclear if the correction is overdone. Longer-term, there is scope for a constructive view on prices. The supply-side remains a structurally supportive element of global oil balances.

While slower non-OPEC production growth may continue, there is also the possibility of OPEC rethinking its current production policy in the wake of slower demand growth. The most likely scenario is that oil prices will be volatile within the $100 - 130 a barrel range over the balance of 2008; and if a narrower band is needed, it could be $105-120 a barrel, barring surprise developments. There will be a seasonal lift in demand in the northern hemisphere.

The OPEC meeting scheduled for September 9 will be keenly watched.

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