Last week saw bulk of the global commodities complex post gains with the crude oil market leading the way due to tightening of the market following anticipated demand expansion and fall in supplies, and further aided by resurgence of geopolitical uncertainty.
Precious metals prices spurted. Platinum gained hugely on fears of supply disruption from South Africa where violence escalated, while gold bulls saw another round of quantitative easing coming after the August FOMC meeting details were out. The release of Chinese data also had some impact on the market.
According to experts, although growth rates for imports of some commodities have slowed from the rapid pace set earlier in 2012, year-on-year gains are still robust. Copper net imports rose by 27 per cent y/y and were also up strongly for zinc and tin; key agricultural commodities also gained with corn imports up by 318 per cent y/y, wheat by 133 per cent and soyabeans by 10 per cent (to their second highest level ever); oil imports expanded by 12 per cent and platinum by 102 per cent . Although the overall global economic prospects still appear weak based on leading indicators, the recent rally in commodity markets has regenerated interest among investors. However, it is clear that the rally in oil markets is caused by geopolitics while agricultural commodity prices are driven by adverse weather conditions.
Additionally, the prospect of QE3 is beginning to boost the sentiment towards certain commodities like gold. If all the constructive developments fructify simultaneously, there should be no surprise over a major bull run in many commodities during the rest of the year.
Gold: Prices have gained traction over the past week. On Friday in London, the gold PM Fix was at $1,667 an ounce, while for silver AM Fix was at a recent high of $30.37/oz. Platinum closed at $1,537/oz.
The metal has gained more than $100 since August 15 and the spread to gold has narrowed. Gold prices have rallied as the euro strengthened and the August FOMC meeting minutes took on a dovish tone, an expert commented adding the effect of lost production of platinum will keep prices of the metal at elevated levels. There are many who believe that FOMC may not resort to QE3 anytime soon unless of course macro data consistently disappoint. However, there are incurable optimists who believe September will be a key month for the metal. The continued strength of the dollar is a real hurdle for the yellow metal to overcome.
Meanwhile, with rising gold prices in dollar terms and the rupee remaining considerably weak, domestic gold prices in India reached a new high last week. This is sure to further hurt physical demand. Even if dollar denominated price were to correct down globally, the Indian consumer is most unlikely to benefit because of currency factor.
Consumers are getting increasingly sceptical about the market. No wonder, gold imports are likely to fall by as much as 26 per cent or by 200-250 tonnes in 2012 as record-high prices hit the budgets of consumers, according to GFMS and India’s gold imports in the second quarter of 2012 plunged by over 56 percent on the year to 131 tonnes according to World Gold Council.
Technical analysts say a close above 1,640 fans a bullish view and the next upside target is in the 1,700 area. A close above 30.40 in silver would encourage a move toward 31.80 area. The medium-term outlook is neutral.
Base metals: The complex continues to display signs of weakness because of a lack of strong growth signals. For recovery in metals prices later in the year, global growth expectations need to improve.
The latest weakness in economic data from China means that a further policy response is now more likely. Therefore, perhaps counter-intuitively, metals prices have actually risen strongly due to a flurry of short covering, remarked an analyst.
Tin has been the stand-out performer, with prices up 8 per cent on the week due to a series of supportive fundamental developments such as supply-side response to lower prices in Indonesia and strong Chinese import demand. As for copper, CFTC data for COMEX copper show that the net short position is the largest since mid-2009. For that move to be sustained, however, would also require an improvement in fundamentals.
Crude: The third quarter is seen turning tight for the oil market. Demand side is set to hit a record due to strong OECD performance, while supplies, both OPEC and non-OPEC, are expected to fall. Brent crossed $ 115 a barrel last week.