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G. Chandrashekhar

Mumbai, July 5

As a class of assets, commodities have been one of the best performing in recent months, bringing attractive returns for investors. In the quarter that just ended, commodities as varied as energy, metals and agriculture demonstrated a creditable price performance. No wonder, inflows of investor funds has expanded.

The big question is whether the trend will continue into the third quarter.

Looking at different factors that impact the market, the most critical being China, there is expectation that price performance may be somewhat muted in the coming months. The pace of investor flow into commodities is likely to slow.

Clearly, China played a pivotal role in the price gains of Q2, especially in case of base metals and to a lesser extent in crude and agriculture.

In addition to seasonal factors, the Asian giants restocking programme (private and government stocks) may slow in Q3.

Commodities where supply dynamics provide support appear to be a good bet.

Crude, for instance, has an upside, albeit limited in the short run. As for copper, despite the possibility of a Chinese purchase slowdown, the fundamentals still look good for taking a long position.

On the other hands, the US dollar is the key driver for precious metals. The negative correlation between dollar and gold has strengthened in recent weeks.

A stronger dollar is putting downward pressure on the yellow metal prices. In London, on Friday, the PM fix for gold was at $932.75 an ounce, slightly up from $929.50/oz the previous day.

Expectation that dollar may further firm up combined with technical selling may pressure gold down in the short term. Silver of course is likely to fare badly because of weak fundamentals and build up of speculative position.

On Friday, London AM fix for silver was at $13.44/oz, up from $13.41 the previous day.

Oil prices fell sharply last week after release of weaker than expected US job data. Because the crude market is closely linked to perceptions about the macro-economy, prices have found support so far with improving sentiment. However, the market could turn choppy if the data flow fails to inspire confidence.

To be sure, for crude, the market fundamentals are indeed favourable, given stabilising demand and OPEC output cuts. Prices may consolidate in the $65-70 a barrel region for the time being, before a decisive move forward to above $75 a barrel.

Last week, following the weaker US job data, there was downward pressure on the market overall. Ongoing concerns over weaker Chinese copper buying too made an impact. Importantly, freight rates for bulk commodities declined last week.

More Stories on : Gold & Silver | Commodities

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