Commodities market remained highly volatile on back of uncertain global economic overview. Although commodities witnessed a broad-based rally on Friday with oil prices moving up by more than 8 per cent, the slowing economic growth in major developed economies such as China and European debt crisis has raised worries of dropdown in demand for commodities such as base metals and crude oil.

Friday’s rally was mainly due to the long-awaited European Union debt deal which pushed back investors to riskier assets such as stocks and commodities. Many of us thought that the Euro summit would turn out to be non-event but European leaders agreed to cut the soaring borrowing costs in Spain and Italy which saved commodities from posting their worst quarterly loss since the financial crisis in 2008.

COMEX gold fell near $1,550 an ounce in the middle of the previous week as investors were frustrated by Fed’s decision to not give additional stimulus and also due to the expectation that the Euro summit will turn out to be a non-event. Gold, which is usually taken as a safe haven investment in the time of crisis, has lost its safe haven appeal and instead is moving in tandem with riskier commodities.

The positive correlation of gold with other riskier commodities was seen in Friday’s rally which took COMEX gold past $1,600 an ounce. The bullion spiked after the European Union leaders agreed to let their rescue fund inject aid directly into stricken banks from troubled euro area states.

Crude oil continued its bearish momentum for majority of the week as weak economic data from China, the United States and Europe pointed to prospects for slower oil demand.

Demand worries and high supplies continued to pressure oil prices and took it lower towards $77 a barrel. But oil prices steadied in the middle of the week mainly due to Tropical storm Debby. The drop in US EIA crude inventories by 0.13 million barrels a day also supported prices at lowers levels. In the late rally on Friday, NYMEX WTI crude oil was one of the major gainers as the worriers over European crisis had hit oil prices very badly.

The EU deal has bought back hopes on the revival of the demand in developed economies. But the rally can be termed as a short covering rather than fresh buying as majority of the traders were short on oil.

Base metals traded in a very narrow range for most part of the week as investors stayed at the sidelines ahead of the EU summit. Traders feared that the summit will not succeed in easing the region's troubled areas that has impacted the metals demand. Copper was trapped within a narrow range due to longer worries about the global economy and demand from top consumer. But copper came out of its range on Friday as investors covered their short positions on EU deal optimism.

Chinese central Bank’s statement of using policy tools to keep money supply steady also boosted copper prices as China is the top consumer of the red metal.

Although we have seen a decent short covering rally in commodities, the near-term environment remains challenging which might keep the price gains in check.

The author is Associate Vice-President, Commodity Research Motilal Oswal Commodities Broker Pvt Ltd.

(This article was published on June 30, 2012)
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