Global commodity markets are clearly torn between expanding liquidity and weakening growth prospects. While low interest rates, pumping of more cash into the market and loosening of the monetary policy combine to buoy prices, the demand side is far from encouraging because of slowdown in China (the mover and shaker of world commodity market), unresolved sovereign debt crisis in Europe and weak growth signals in the US. Investor interest, geopolitical developments and currency market gyrations are other dimensions of the commodity market dynamics. So the big question is: where does one put one’s money.

It is in such an unsettled and uncertain scenario that the world commodity markets have been operating. Last week there was broad-based pressure with prices generally down in choppy trading conditions. The headline effect of Fed and ECB announcements has waned. Base metal prices in particular have moderated further because of uninspiring Chinese economic and metals data. Although LME base metals prices rose on Friday, but still most finished down on the week, except nickel and lead. Aluminium was down 4.2 percent and tin 4.1 percent.

Gold and silver have of course benefited from QE3, but investor sentiment and macro environment still hold sway. The yellow metals gained marginally over the week as a whole and hit a new record in euros. WTI crude was down. Agricultural prices have declined on not only macro concerns but also harvest pressure in the northern hemisphere. Corn (maize) and soybean prices came under pressure last week from strong harvest progress in the US and anticipated supply response to high prices from the southern hemisphere in the coming months.

According to experts, October tends to be a bad month for commodities in general. Seasonal trends point to best median returns for natural gas. As measured by median returns, October is the worst month of the year for copper; and the worst month of the year for gold as measured by mean returns. Generally, the key differentiator for price performance will be vulnerability to external factors such as geopolitics or weather. The oil markets still look prone to further tightness and supply disruption, while the base metals look fragile in the context of Chinese import demand slowing. Agricultural markets may be set to ease somewhat. Most analysts tend to believe, gold is the most promising.

Gold: For the commodity struggling to find upward traction from the beginning of the year, announcement of QE3 has been a big shot in the arm. With the dollar weakening, and debates over inflation and currency debasement moving back to centre-stage, many believe the yellow metal will benefit. However, this is not without concerns and roadblocks. The physical demand is still lackluster in major consuming markets. Record high prices in the domestic market because of a weak rupee (despite recent firming against the dollar) have resulted in demand compression in the world’s largest consuming market India.

The world market is swayed by investor sentiment. The gold bulls are betting on central bank buying. Outflows have been witnessed in ETPs due to profit taking. So the road to $ 1800/oz is not going to be smooth. If the equities market especially in the US begins to improve as is expected during October, it can potentially cap gold’s upside.

In London on Friday, the gold PM Fix was at $ 1776 an ounce, up from the previous day’s $ 1763/oz. Silver followed suit with Friday AM Fix at $ 34.65/oz versus previous day’s $ 33.95/oz. With labour issues in South Africa settling, platinum and palladium prices have begun to ease.

According to technical analysts, a bounce above 1737 encourages a bullish view for gold. Above 1791 would trigger a double bottom reversal targeting the 1921 highs initially. For silver, one can look for a move above 35.20 to confirm upside toward targets near 37.50. The medium term outlook is bullish.

Base metals: The market is concerned about low business confidence, faltering growth and poor demand. In the event, weakness in Chinese import demand will become a more critical driver. According to experts, the latest data show that after the broad-based strength that characterized China’s commodity import demand for much of this year, a more mixed picture is emerging.

The market participants are looking for sustained flow of positive macro data which on current reckoning looks hard to come by. Dollar weakness has been of little help. On Friday, in LME copper closed at $ 8212 a tonne and aluminium at $ 2085/t.

According to technical analysts, upticks in aluminium and copper would need to extend above the September highs near 2200 and 8425 respectively to signal further upside traction toward the 2012 highs. From there, one can look for weakness toward 1970 and 7820 area. The medium term outlook is said to be bullish.

Crude: Oil markets recovered after weakness early on in the week, with the relative outperformance of Brent helping widen the Brent-WTI differential to $ 20 a barrel. Import demand in China has weakened with August crude inflows falling to their lowest level in almost two years and consumption growth staying flat year on year.

According to technical analysts, above nearby resistance at 113.80, Brent would signal upside toward 115.65 area before looking for signs of a top. A move above 94.35 in WTI is needed to encourage a more bullish outlook toward 97.35 area. The medium term outlook is said to be neutral.

(This article was published on September 30, 2012)
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