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G. Chandrashekhar

Mumbai, Feb. 1 Commodity markets continue to be haunted by volatility and highly divergent short-term trends.

This is sending confusing signals to participants.

Weak equity market performance and release of grim macroeconomic data are seen battering the sentiment.

In addition to poor economic releases in Japan, the US Commerce Department data showed the country’s GDP contracting at an annualised 3.8 per cent in the fourth quarter, the fastest rate of decline since 1982.

Investor interest, particularly on the retail side, seems to be rising.

Precious metals appear to be a favourite as reflected in the price performance.

Oil, too, seems attractive buy at current price levels.

Despite the dollar strengthening, the yellow metal got a boost in the last few days because of safe haven buying. Investors ignored the dollar strength and sought to increase their exposure to gold as a safe haven asset in the wake of weak equity market performance and release of grim economic data.

Gold reached its highest level since October 2008 breaching the $900 an ounce barrier. In the London market, on Friday, the PM Fix was $919.50/oz, up sharply from $892.25/oz the previous day. Silver followed suit. On Friday, the AM Fix was $12.51/oz, up from $11.74/oz the previous day. Platinum and palladium too firmed up. Physical buying of gold has increased as evidenced by inflow of quantities into physically backed ETF. Retail sales of coins and small bars are also reportedly soaring. Will gold prices maintain their upward momentum from here? Much depends on investors continuing to turn to gold. One can expect more supportive factors to come into play during the year.

Primarily, the recent strength notwithstanding, the dollar is most likely to weaken during the course of the year as the US fiscal deficit balloons further. Secondly, low interest rates and expansion of liquidity would combine to encourage inflation. These factors are likely too support gold in the months ahead. However, in the short term, if the safe haven buying eases, there is the possibility that the metal may come under pressure amid a deflationary environment or during bouts of dollar strength. According to technical analysis, in the short term, gold has an upside. The focus is on $931. The metal broke above the trend line resistance near $915, which creates possibility of further gains. A break above $931 would trigger further bullish interest for a run to $988 and overthrow of the $1033 peak later this year. In the medium term, gold is setting up for a run beyond $931/44 resistance and to $1033. Gold is rallying strongly when priced in sterling or euro, at record levels and still rising. When priced in dollars though, it is still holding within the choppy downturn that began last year. However, this trend is on the verge of reversing, experts pointed out.

Already engulfed in bearish sentiment in the wake of depressing economic scenario across the world and in major consuming economies, the base metals market continues to be battered by flow of poor data from time to time. The market is deeply concerned over loss of demand and rising inventory. Production cuts have not helped stem the slide. No wonder, positioning has moved decidedly to the short side of the market for many metals. This leaves prices prone to violent bursts of short-covering. So, in the short term, rallies will be short-lived and provide an opportunity to sell into.

A key force behind the decline in oil prices since mid-2008 has been the sharp deceleration in global economic growth and consequent decline in oil consumption. Consumption is set to remain weak in 2009. Of late, the market has been volatile despite the fact that there have been no major price impacting developments. Demand surely stays weak. The latest Chinese and European data are far from encouraging. There is expectation that the market would come into balance with the high level of compliance by OPEC and continued disappointing non-OPEC production. As the year progresses, supply cuts will make deeper inroads into the market balance. Also, there are signs that the US inventory overhang will begin to dissipate over time. Oil prices will remain weak or at a soft level in the near term.

More Stories on : Commodity Markets | Gold & Silver

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