The Hindu Business Line : Gold struggling to retain investor interest

With early signs of a recovery and robust demand from emerging Asian economies continuing, the price performance of broader commodity markets has been improving steadily in recent weeks.

Importantly, however, there are signs that the price appreciation is now slowing, and possibly, in some cases such as base metals, there could even be a correction in the event demand from China dries up.

It may of course be tempting to attribute the price moves to increasing investor interest; but the fact remains that fundamentals are steadily catching up.

Improving fundamentals - rising demand, supply cuts and less-burdensome inventory - are a primary cause for price appreciation which is accelerated by flow of speculative capital as is evident from the build up of long positions on the bourses.

Steel prices, strong indicators of consumption demand and, thereby, economic activity, have been rising in recent weeks.

World export price for hot-rolled coil has increased by about 20 per cent from its late-May trough of $394 a tonne f.o.b.

Although commodity demand in major OECD economies is still weak, leading indicators are already pointing to improving conditions. At the same time, concerns over slowing growth have not gone away.

The latest World Bank projections are far from encouraging.

Therefore, there still are uncertainties about global growth prospects in the coming months although a sense of cautious optimism is prevalent. Under these conditions, commodity markets are most likely to trade sideways until clear signs of genuine recovery in demand become apparent.

The delay in onset of Indias southwest monsoon is also being closely watched by international market players.

Poor farm growth in India is sure to depress demand for gold in the worlds largest consuming market.

At the same time, it may open up market opportunities for exporters of agricultural commodities such as pulses, vegetable oil and sugar.

Gold

Prices continue to take their cue from currency and equity market movements.

After starting the week on a particularly weak note, the yellow metal regained strength. Tactical investors are said to be at the helm of golds upward trajectory.

In London, Friday PM Fix was at $942.00 an ounce, up from $937.25/oz the previous day.

Silver was up 2.8 per cent from Thursday AM Fix of $13.87/oz to $14.26/oz the following day.

There is expectation that the US dollar, with which gold’s negative correlation is well established, may strengthen over the coming weeks. In addition, a decline in physical interest and the possibility of technical selling may weigh heavily on prices.

If gold prices ease, silver will find itself more vulnerable because of its weak fundamentals and build up of speculative interest.

Closer to $900 or below will result in resurface of jewellery demand.

In the near-future, the yellow metal is sure to struggle to breach the magic four-digit mark.

It is more likely to remain volatile and trade between $880/oz on the low side and $970/oz on the upside.

In the longer-term, the dollar is widely expected to weaken, inflation to build and investor interest to pick up, all of which will allow gold to gain upward movement.

Base metals

The complex has demonstrated attractive price performance in recent weeks, primarily because negative growth signals from many parts of the world are turning weak and a sense of cautious optimism is beginning to pervade.

Although, fundamentals of some metals are weak, strong Chinese demand has lifted all boats.

In addition, LME open-interest data suggest that new longs have been the main driver of base metals price strength in recently.

Funds seem to be allocating more long-only money to commodities.

Last week most base metals closed virtually unchanged, except nickel which was up fur per cent on the week. Seasonal factor - weak summer demand - is at play.

Global growth projections from agencies such as the World Bank are sure to raise demand concerns.

It is increasingly seen that much of the recent good news about global growth and future prospects has already been factored-in to base metals prices.

The single biggest risk to the prices of this complex is the over-dependence on the Chinese demand.

There could be a change of sentiment should Chinese demand begin to weaken.

There is of course considerable amount of conjecture whether or not Chinese demand is beginning to ebb.

As evidence of slowing Chinese demand emerges, copper could come under pressure; but the downside is limited at best to about $4,500/t.

Nickel prices have spurted to over $15,400/t primarily because of improvement in stainless steel buying. It is debatable if current prices are sustainable. There is potential for a pullback to $13,500/t.

Crude

The market is in a state of broader consolidation in the range of $65-75 a barrel, influenced as it is by flow of macroeconomic data and currency movement.

Gradually improving demand and falling inventories now characterise the market.

While demand has been good to robust in non-OECD countries, there are signs that the demand in large industrial economies is beginning to improve.

In the US, the crude inventory overhang has reached its lowest point for the year.

In other words, fundamentals are beginning to catch up. Staying long is advisable.

In the second half of 2009, crude prices have the potential to regain their upward march, subject of course to the caveat that there is no further deterioration in macroeconomic conditions.

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