After languishing for weeks, the global commodity markets suddenly came to life on Friday, with positive news from EU summit driving a relief rally. Crude oil, base metals and precious metals all registered significant price gains. Week-on-week all base metals were up with copper making a big gain of 5.1 per cent and zinc 4.7 per cent.

Gold was up on the week 2.1 per cent and silver by a modest 1 per cent. Grain prices too posted handsome gains over the past week as heat and dry weather conditions in the US Midwest threatened to hurt crop prospects.

Does it presage a change in global commodity market sentiment? Coming after the recent price declines which were among the steepest since the crisis of mid-2008, the latest movement may be a precursor to a comprehensive review of the global market conditions. Without doubt, markets expected little progress in the European debt crisis and priced-in deterioration in Chinese growth. To be sure, conditions have certainly not improved as yet; but the backdrop may be turning reasonably constructive with sluggish supply growth and low inventory levels in many commodities. Easing of monetary policy is seen as a contributory factor. To fight inflation, many emerging economies had resorted to monetary tightening last two years which, in turn, resulted in slowing domestic demand and investment. With the decline in commodity prices – crude and metals in the main – central banks have begun to see scope for further policy easing. Many experts expect the People’s Bank of China to cut rates in the current quarter as well as significant rate cuts in India, Brazil etc. in the second half of the year.

So, an improvement in market sentiment could lead to a healthy bounce back in prices of various growth-related commodities. As for agriculture, weather aberrations can potentially lead to supply disruptions and force market participants to re-think on supply and price expectations. As always, the macro data need to be watched. They are becoming increasingly critical for the market; and unless we have a steady flow of positive data to signal a sustained recovery, it would be risky to bet on far forward positions. The investor sentiment towards commodities is not as robust as it used to be as indicated by institutional and retail sector outflows in May. So, as usual, caution is the watchword.

Gold: As macro uncertainty heightened and the dollar strengthened, precious metals prices had tumbled in recent weeks with gold rates moving to the monthly low of $ 1,551 an ounce last week while silver dropped to $ 26.34/oz, the lowest since November 2010. But Friday witnessed a huge rebound in gold prices with London PM Fix touching $1,599/oz up from the previous day’s $1,559/oz. Silver AM Fix was at $ 27.08/oz on Friday versus the previous day’s $ 26.81/oz.

On the physical side, demand conditions for gold have continued to remain soft. With local prices hovering around record levels in India and the Indian market not being able to obtain the benefit of lower international prices due to the rupee weakness, traders are not sanguine about demand conditions. Unless the yellow metal is able to recover its safe haven status, it will have to depend solidly on physical demand. Concerned over huge outflow of precious foreign exchange, the Union Government is likely to impose newer controls on gold imports.

According to technical analysts, a decisive break above 1,590 in gold would signal further upside toward the 1,640 area. Silver has managed to hold above important support near 26.00; but in the long-term remains vulnerable toward 24.25 and then 21.35. The medium term outlook is neutral.

Base metals: Friday was a big day for the base metals complex with the ‘big five’ rising more than 3 per cent on the day. Copper was a big gainer despite the fact that Chile reported a year-on-year increase in copper output in May 2012. The potential for copper to rise through Q3 is growing, experts have asserted.

That said, it is important not to overlook the continuing pessimism about the macro-economy. In some cases, prices are said to be eating into industry costs, which have already driven up supply cuts in aluminium and nickel. The near-term downside risks to prices continue to haunt the complex in the wake of European conditions and Chinese consumption demand. However, there is widespread expectation of a rebound in Chinese growth in H2 with potential implication for base metals prices.

According to technical analysts, near-term upside scope for copper is seen toward 7,900 where signs of a top may appear and weakness may resume. In aluminium, selling interest near 1,950 is expected to cap upticks, keeping the focus lower toward 1,828. Medium-term outlook is bearish.

Crude: The market faced a volatile week, with prices generally inching higher. Asian demand is picking up and OECD demand looks healthy. How the EU sanctions on Iran oil supply would pan out in the coming days will have to be monitored. Prices are expected to build a base for a recovery over time.

(This article was published on July 1, 2012)
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