The latest OECD composite leading indicators (CLIs) point to easing in the pace of economic activity in major economies that are OECD members and a more marked slowdown in non-member countries, mainly emerging markets. The leading indicators are designed to anticipate turning points in economic activity relative to trend. In particular, the CLIs for China and India point strongly to a slowdown with economic activity falling below long-term trend. Global commodity markets have to take cognizance of moderating growth expected in the US and slowdown in Euro area economic activity. For agricultural markets, weather-induced problems in some key producing countries – wet weather in Brazil, hot and dry conditions in the US Midwest and aberrant monsoon rains in India – are already pushing prices higher.

The latest OECD-FAO agricultural outlook 2012-2021 has cautioned that food price inflation remains a concern in developing countries although prices have come off recent peaks.

Agricultural prices will continue to remain on a high plateau driven by higher energy costs, diversion of traditional food crops for biofuels, expanding demand and slowing supply response to prices.

Last week saw grain price continue their upward trend with soyabean hitting fresh all-time highs. The deteriorating US corn and soyabean crop conditions mean lower yields and tighter supplies. Week-on-week all base metals were higher following a price spike on Friday. Copper was up 2.3 per cent to close at $7,709 a tonne on LME. All precious metals, except platinum, were higher, while crude was up too.

Following the ongoing macroeconomic uncertainty, many analysts have lowered their price forecast, especially for base metals and precious metals. Tight supply and/or costs will likely support the downside, while the demand push needed to break prices out to the upside ranges now looks unlikely to develop until Q4, according to experts.

Base metals prices may range-trade in the near-term and then recover strongly in the last quarter of this year and the first half of 2013. So, bouts of short-covering rallies and event risk will remain elevated.

Gold: The FOMC meeting was a huge disappointment for gold bulls as there was no signal for further asset purchase. The dollar strengthened to reach a two-year high last Thursday. The precious metal prices faltered as it has reverted to its status akin to a risky asset as European sovereign debt issues took centre stage. Physical demand has remained soft. ETP holdings are said to be resilient.

On Friday, in London, gold PM Fix was at $1,596 an ounce, up from the previous day’s $1,556/oz. Silver AM Fix for Friday was $27.48/oz versus previous day’s $26.67/oz.

Aberrant monsoon in India and risk of lower farm output has further pressured the gold market. Domestic prices continue to remain high due to a substantially weak rupee. The relationship in India between rural incomes and gold demand is well recognised. One can expect more and more of scrap sales to come into the market. Volumes traded on the Shanghai Gold Exchange have stayed below the annual average. The platinum market this year may register a surplus, while the palladium market may move into a deficit.

According to technical analysts, gold silver ratio points to further gold outperformance through most of the summer. Near-term bounce in gold continues, but ultimately still a range between 1.525 and 1,640. Silver looks bearish while below 28.00 trendline resistance. The medium-term outlook is neutral.

Base metals: Despite the far from encouraging overall macroeconomic situation, the market rallied on Friday with the sentiment boosted by Chinese GDP and a successful Italian bond auction. Strong close to the week saw base metals in positive territory week-on-week with copper rising to $7,709/t on Friday, up from the previous day’s $7,574/t.

Unless there is solid evidence of economic activity reviving – and the prospects appear dim at the moment – base metal prices are sure to trade in a range. Tight supply conditions in copper and tin will support the downside. There is some expectation that growth conditions will improve in the second half of the year, the effects of which may be visible in the last quarter which means an improvement in end-demand, which in turn, will accelerate the tightening effect. Imports may pick up towards the year-end.

According to technical analysis, copper has broken bullishly, but remains within the larger range of 7,220-7,825. Aluminium downtrend continues toward prior lows at 1,831. The medium-term outlook is bearish.

Crude: Despite a fragile macro backdrop, prices improved last week. There are incipient signs of improvement in demand with Asian petrochemical prices picking up slowly and physical grades strengthening.

According to experts, oil-specific factors have improved markedly over the recent weeks and should help support prices around $100 a barrel.

(This article was published on July 15, 2012)
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