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G. Chandrashekhar

Chennai, Nov 9 With consensus among economists veering around to global recession, demand side concerns have further come to the fore. World economic growth on an average is now forecast to be less than three per cent in 2008, while the IMF has talked about growth at 2.2 per cent in 2009. Three per cent is generally perceived as the threshold level for the onset of recession.

The OECD composite leading indicators have overall been good predictors of industrial production. The latest data for September 2008 confirm if conformation was needed, of deepening slowdown across the globe. What these indicators have in store for the rest of the year may be scary to imagine.

As there is a strong positive correlation between economic growth and commodities consumption — mainly energy and metals (base metals and steel) subdued economic growth prospects are expected to hurt demand prospects.

World over, even as speculators (euphemistically called non-commercials) have exited the markets in a big way, the existing poor sentiment is forcing even retail investors to follow suit. So, some more pain may be left in the commodity markets, even though generally it can be averred that from the current levels the downside is rather limited and the time for going further short may be coming to an end.

In many cases, forward positions do not reflect the current panic in the near-month prices.

On the other hand, the effects of production cuts, especially in crude and metals, will soon begin to kick in. That raises the possibility that the current low prices cannot sustain for long. Importantly, as and when the dollar begins to weaken, it is only a matter of time prices of dollar-denominated commodities will receive a lift.

The market came under pressure last week with the continued strong run of the dollar. Demand side too was tepid. Indian physical buying has suffered because of high and volatile prices, with a weak rupee largely neutralising the advantage of price declines in dollar terms. From a fundamental perspective, the gold market is likely to stay in surplus this year because jewellery demand has suffered in the first half of 2008.

On Friday, the London PM Fix was $735.25 an ounce, down 2.6 per cent from the previous day’s $754.50/oz. Silver too fell by a similar size to $10.13/oz (AM Fix on Friday) down from $10.41/oz.

However, going forward, there is widespread expectation that the dollar will weaken in the medium term which in turn will lift gold prices up.

The unprecedented speed and scale of price collapse in the base metals complex is clear indication of the cataclysmic changes that have come about in the global economic environment. Rising inventories add to the existing burden. It is not global slowdown but a full blown recession that the market seems to have priced in.

Aluminium, zinc, lead and nickel are trading below marginal costs.

There are no signs, however, incipient, of a change of sentiment or revival of demand. It is risky to even hazard a guess when business confidence would improve. Supply response has already begun. Fresh investments have been put on hold and production cuts have been announced in response to the price action. These steps will store problems for the future.

Extreme caution is advised in trading. Short-covering rallies are possible; but market fundamentals are such that the rallies may not sustain for long.

Aluminium may trade in the range of $1,900-2,100 a tonne, while copper will be range-bound with any dip below $4,000/t providing a buying opportunity.

Nickel demand is weak and stocks are rising. So, selling into rallies above $13,000/t may be advisable.

The market has been under pressure from rising stocks and tepid demand, especially in industrialised nations. Yet, there are indications that prices are stabilising around the mid 60s area. While growth of non-OPEC supplies continues to remain suspect, OPEC’s decision to cut output by 1.5 million barrels a day will begin to pinch soon. Compliance is of course the key. Further cuts are not ruled out.

In the short-term, prices are expected to remain under pressure. However, a combination of tighter supplies and weakening dollar should begin to propel the market higher. It is anybody’s guess how soon this would happen. On current reckoning, a six month time frame for higher front-end crude prices looks plausible.

More Stories on : Gold & Silver | Commodity Markets

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