Monetary policy was at the core of last week's global commodity market price movements. Unexpectedly, China loosened its policy with a symmetric 25bp cut to the benchmark lending and deposit rates, while the ECB and Bank of England left the policy rates unchanged. More important was the balanced tone of the US Fed Chairman who did not promise any further accommodation, but did not rule it out either. In the backdrop of apprehensions over global growth prospects and attitude to risk, global commodity markets reacted to external stimuli as experts pointed out. Prices traded in a wide range and markets were choppy.

While news from China boosted the sentiment for a short period of time, prices fell after prospects for an immediate quantitative easing (QE) in the US diminished. It is of course increasingly clear that the Chinese authorities are now concerned over slowing growth — evidenced by April data — and want to accelerate the pace of growth. More monetary loosening cannot be ruled out.

Week on week, gold was down (1.8 per cent), but other precious metals were up with silver rising by 2.9 per cent. Among base metals, copper and zinc were down each by 1.2 per cent, and crude was under pressure. With continued uncertainty dogging the Eurozone, the US dollar stayed firm, exerting pressure on commodity prices.

Going forward, several meetings of policymakers in June and their outcome will have a bearing on the market. It is a period to be cautious. Many believe, the second half of the year will be better than the first half in terms of macro data and demand conditions; but until sustained evidence is available global commodity markets will continue to be edgy. In cases such as crude, the fundamentals are constructive, but the sentiment is so weak that prices are unduly pressured.

Gold: On Friday in London, all precious metals were down. Gold PM Fix was $ 1,577 an ounce, down from the previous day's $1,606/oz, while silver followed suit with Friday AM Fix at $28.17/oz versus previous day's $29.28/oz. Gold prices — which had been lifted by expectation of further quantitative easing following weaker than expected US non-farm payroll data — rolled back in disappointment.

While a strong dollar continues to pressure gold prices down, the physical market remains weak. Inflows into India and domestic sales have slowed down, while Chinese market conditions are not healthy either. With domestic prices at near-record levels, scrap sales in India are picking up. Globally, the metal is actually struggling to reassert its safe haven status; but is increasingly behaving like a risky asset. ETP holding are a matter of consolation.

What is holding up gold prices is the continued expectation of QE3 which some say may be hoping against hope. Macro data in the US will have to get worse from the current levels for QE3 to happen. So, there is just about a 50 per cent chance that the Fed will ease at the next FOMC meeting. Until then one must be ready to bear with choppy conditions in the market.

According to technical analysts, as expectations of another round of QE were dashed crushing the nascent rally in gold prices, they have reverted to a neutral view 1,530-1,630. Silver is ranging 27-30. The medium-term outlook is neutral.

Base metals: For a market buffeted by growth concerns – economic crisis in Europe and slowdown in China - the rate cut announced by China last week was a sentiment booster the market has been waiting for some time. The rate cut supports expectations of more robust Chinese demand for base metals in the next two quarters.

From a desperate situation, there is now a sense of cautious optimism about the second half of the year generated by hope that there could be further loosening of monetary policy. While China's macro and trade data have to be watched carefully in the coming months, experts assert that zinc, lead, nickel and aluminium prices have the least downside from the current levels.

Copper prices will continue to be impacted by net imports into China. On Friday, LME cash copper was $7,283 a tonne and zinc $1,863/t. For the base metals complex to gain, the world needs to see sustained flow of positive macro data, especially focusing on China.

Technical analysts point out that the short-term copper trend is bearish and the next target is 7,090. For lead, nickel and aluminium, closes below trigger points at 1877, 15861 and 1955 respectively would suggest more aggressive bearishness. The medium-term outlook is bearish.

Crude: The sentiment is fragile even as macroeconomic concerns have driven tight fundamentals into the backseat. Questions are being raised whether crude prices have overshot to the downside; but for importing countries recent price declines have provided a breather.

Chartists see the corrective crude rally faltering. If Brent does not recover above 105 and WTI 90, they recommend sell on rallies as demand weakness is likely to persist. The medium-term outlook is bearish.

(This article was published on June 10, 2012)
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