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G. Chandrashekhar

Mumbai, Nov. 8 The nature of macro-economic data flowing in the last few days is beginning to boost confidence of commodity market participants. The latest OECD leading indicators are a case in point. They are incrementally bullish. There is broad strengthening of global manufacturing confidence and improving signs of industrial activity, particularly in the US. Is the economic recovery in OECD at the cusp of the rapid-growth phase of the V-shaped recovery as many believe? Time will tell, and soon.

We must also remember that the current positive data could also be partially the result of base effect because of the weak growth both inside and outside China in the last quarter of 2008. Be that as it may, the current optimism about growth is palpable across markets.

Yet, commodity market performance was somewhat mixed last week. There was a broad-based price decline across base metals complex following concerns over possible slowing of Chinese demand. On the other hand, sugar turned bullish on reports of downgrades to Indian production forecast for 2009-10 and wet weather impacting cane harvest in parts of Brazil.

Purchase of 200 tonnes of gold by the Reserve Bank of India from International Monetary Fund (IMF) was the most significant news for the commodities market last week. It helped renew the status of the yellow metal as a safe haven and an asset for portfolio diversification. It is of course an entirely different debate whether the RBI should have purchased gold worth $ 6 billion.

The week was not without concerns. The US payrolls fell by 190,000 in October, driving unemployment to 10.2 per cent, up from 9.8 per cent in September and the highest since April 1983. It was the 22nd consecutive month of declining payrolls. Since December 2007, the number of unemployed persons has risen by 8.2 million. However, the pace of decline has slowed markedly since a 741,000 decline in payrolls in January 2009.

The US dollar continues to stay on a downward sliding trajectory, providing a price push to a range of commodities.

Gold: Prices rallied last week boosted by India’s surprise purchase of 200 tonnes from IMF. The positive price momentum is palpable. The metal set yet another all-time high of $ 1,092.2 an ounce. With the greenback gradually slipping, investor sentiment has turned more positive.

In London on Friday, gold PM Fix was at $1,096.75/oz, up from $1,089/oz the previous day. Silver too was strong with Friday AM Fix at $ 17.53/oz, up from $ 17.38/oz of the previous day.

The CFTC data have revealed sizeable long liquidation already. Investors are booking profits. There could be further long liquidation. However, investor demand remains robust. The net long speculative positions are close to all-time highs. Clearly, the weight of investment demand and speculative interest has overshadowed any weakness in physical demand.

According to technical analysts, gold has a tendency to trade near round numbers for a few weeks. August was around 950, September near 1,000, and October near 1,050. Thus 1,100 could become a sticking point for the metal. In the medium-term, the healthy price action noted since the last few months points to a gradual escalation towards 1,500, especially while the market holds above 1,060.

Silver is broadly triangulating above its old summer peaks and this points to a test of 18.70 into year-end. Near-term, a recovery above 17.77 would likely trigger bullish follow through.

Base metals: The complex is sensitive to economic growth. While data flows present a positive picture, there are also apprehensions over slowing Chinese demand without a corresponding prospect for increase in OECD demand. The US non-farm payrolls data released last week disappointed the complex.

For the rest of the year, base metals’ fortunes are going to depend on a combination of factors including equity market performance, dollar gyrations and nature of economic data. Copper and zinc have the strongest upside potential.

Crude: Improving oil demand fundamentals and positive DOE data support prices. Crude seems to be well set in $70-80 a barrel range, attempting to break into a higher range of $75-85 a barrel. With global economic data largely positive, a solid groundwork for a sustained move to higher prices ranges seems to have been laid. Key countries that faced weak demand – USA, Japan – begin to show improvement.

More Stories on : Gold & Silver | Commodities

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