It was a mixed week for the global commodity markets as crude oils had a buoyant time, agricultural prices, especially grains, escalated to fresh all-time highs, but the metals sector – base and precious – had little to show. Expectations of further quantitative easing – never a sure thing though – initiated some momentum in the crude oil market which was kept going by the situation in Iran.

As for agricultural prices, the worst drought facing the US in several decades has put paid to earlier hopes of a rebound in northern hemisphere crops and softer prices. Other parts of the world are not without danger. India is facing drought-like situation while weather in the Black Sea region is unhelpful.

The entire precious metals complex was down over the week with gold declining 1.2 per cent and silver 1.5 per cent. As for base metals, the mixed price action in the sector meant a general decline with the exception of lead (1.2 per cent) and tin (0.9 per cent) prices.

Copper prices were the weakest performer with a fall of 2.2 per cent. The emerging scenario is one of concern. European sovereign debt, slowdown in China, continued high unemployment levels in the US, geopolitical instabilities and last but not the least weather worries in major farming regions can potentially hurt demand and growth. The world is threatened with a third wave of food inflation in less than five years. Food-import-dependent poor countries would be badly hit.

Investors are exiting commodities. Growth signals are not strong enough or sustained. Demand, especially for growth-driven crude and metals, is far from robust. There is risk that more speculative capital may flow into agricultural goods and contribute to a further wave of price spikes. Governments may be forced to impose trade and tariff restrictions. The Union Government, for instance, is already contemplating a series of restrictions on farm goods as a response to the drought-like situation and imminent decline in production of key crops. Simply put, the policy environment is becoming increasingly complex.

Despite all the ongoing uncertainties, many analysts are sanguine about the second half of the year, premised primarily on a rebound in Chinese demand. In particular, lead and zinc markets are expected to move to deficit which will help prices higher. Current high prices of agricultural crops may result in better supply response (mainly corn and soyabean) from the southern hemisphere going forward.

Gold: Prices are stabilising below $1,600 an ounce. The ‘big disappointment’ for the gold bulls was provided by the FOMC Chairman. No QE 3 for the time being. But this is a market where, as always, punters will hope against hope. Last Friday, London gold PM Fix was at $1,576/oz, down from the previous day’s $1,584/oz. Silver followed suit with Friday AM Fix of $27.07/oz versus the previous day’s $27.45/oz.

If the yellow metal’s safe haven status is shaking, the physical market continues to be unhelpful. High prices caused by a weak currency (rupee) have already hurt demand in large markets such as India. A poor monsoon will further weaken demand. In anything, scrap sales will rise. Buying has slowed in China too.

According to technical analysts, gold continues to range trade and if it follows its usual seasonal tracks, then the market may be looking at another month of sideways chop. Range to continue in silver 26.15 and 28.46 near-term. Medium-term outlook is neutral.

Base metals: Although the sentiment is not exactly robust, prices seem to be stabilising, mainly in the mounting hope of policy action to address ongoing concerns. Until some decisive policy action is announced, the market is most likely to continue to trade in its recent range. In case of copper and tin, tight supply conditions will support the downside.

Copper closed at $7,543 a tonne on LME Friday and lead at $1.894/t. While much of the price performance hinges on expectations of recovery in the last quarter of the year, there may be bouts of short covering rallies. All eyes are on China. As copper stocks begin to fall and end-demand conditions expected to pick up later in the year, a tightening effect will be seen.

According to technical analysts, the bearish focus on copper and aluminium will continue as the tests higher have proven unsuccessful. However, the next leg of downside needs through 7,225 in copper and 1,830 in aluminium to kick off in earnest. The medium-term outlook is bearish.

Crude: A buoyant week saw crude (Brent) prices gaining by $5 a barrel and closing higher on every trading day. Iranian exports are seen declining under the weight of European embargo and the US sanctions. Experts assert that expectations of market balances in Q3 have become more constructive. On the other hand, there has been no weakening trend in expectations caused by shale oil or European demand.

Technical picture suggest that Brent is exiting its sideways seasonal period, entering what is usually an aggressive uptrend which lasts into early October. Signs of Hurricane in the US will be keenly watched. A break above 109 is necessary before turning bullish while support is seen at 101. The medium-term outlook is bearish.

(This article was published on July 22, 2012)
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