The Hindu Business Line : Uncertainty, volatility mark metals market

Mumbai, Sept 21 By any reckoning, last week was extraordinary for the global financial circles. Commodity markets were buffeted by broader financial market developments that sent everyone scurrying for risk reduction. A sharp decline in liquidity was evident and this resulted in high volatility.

While crude oil market traded in a wide range of 10 per cent ($9), gold was up by a mind-boggling $87 an ounce last Thursday, the largest ever single-day gain. Agricultural markets – corn, wheat – too witnessed upward movement. But on Friday, gold futures collapsed dramatically with the central banker’s announcement of a rescue package for the beleaguered financial market. While prices of some commodities overshot on the downside, some moved up steeply on non-fundamental considerations.

As is axiomatic, sooner, rather than later, market fundamentals are bound to catch up. Having fallen too low, some metals seem to have a strong upside from the current levels and these include platinum, lead, tin and copper.

Gold

Dramatic movements in foreign exchange, financial and equity markets have made the yellow metal extremely volatile in recent days. In the London spot market, the PM Fix on Friday was $869 an ounce, up from $863/oz the previous day. While lower prices below $750 an ounce definitely encouraged physical buying, experience tells us that volatility at high price levels drives buyers away. Safe-haven buying is the only thing that can support prices at higher levels. Obviously, investor interest is the key to profits in the gold market. As is well known and unfortunately, investor interest has been rather fickle.

On the Comex, investors have been reducing their exposure to gold for several weeks now. So, in the short-term, the price of the yellow metal is clearly in the hands of investors, and their perceptions of dollar movements. Strong support provided by physical buying in some key markets such as India to meet seasonal demand arising out of marriage, festivals and the like, may cushion the downside. Once this seasonal demand runs its course, the market may head down. The near-term is marked by a lot of uncertainty. Caution is advised. Over the course of the coming year, gold prices will be a function of the competing influences of recovering jewellery consumption demand versus diminishing investor interest in the context of a significant realignment of exchange rates.

Gold prices in US dollar terms may decline in 2009 if the widespread expectations of the greenback further appreciating against the euro materialise. However, if the global financial markets go through further pain, there is every possibility the metal will return as safe haven investment. In India, a depreciating rupee is making imports and local prices more expensive. Buying support is sure to wane at higher price levels. In sum, tough times are head. The market needs to be watched on a continuous basis for price signals. The roller coaster ride of last week has sent confusing signals.

According to technical analysts, if gold remains above 820, a bullish view would be justified and there is chance of the market moving further up towards 900 and breaching it sometime during the rest of the year.

Base metals

Poor sentiment, macroeconomic concerns, financial sector woes and risk reduction are all weighing on base metals prices as the market witnessed huge sell-offs. A look at the open-interest data reported by LME indicates that the base metals all saw long liquidation over the past week, with particularly large declines in open interest in aluminium, lead and tin. However, the market bounced back Friday last, because of renewed confidence that flowed through the equity market that triggered a short-covering.

Copper managed to gain 4.6 per cent to $7,085/tonne, despite increase in LME and Shanghai inventories. For the week, nickel and tin were the hardest hit, with the former down 12.5 per cent to $16,733/tonne. Demand concerns continue to haunt the market. Slowdown in major economies is pressuring prices. Re-emergence of demand will boost metals prices; and at this point of time, copper, tin and lead look ready for a spike. China should lead the way for base metals complex price recovery.

Nickel would continue to be under pressure in the absence of a pick up in stainless steel, while zinc market may have a further downside given weak Chinese demand.

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