The US debt ceiling and budget stand-off has begun to generate concern. So, this week assumes heightened importance.

Although there is hope the debt ceiling issue may be resolved before October 17, if the fiscal impasse continues, it is possible that the Fed tapering may be again postponed to next year.

However, if an agreement is reached, the market will focus on the strength of the US recovery; and assets that are leveraged to an improving US economy should outperform, according experts.

In the LME week gathering in London, there were no clear signals where the metals markets were headed.

While global business confidence has been improving and there are signs of stabilisation in China, accelerating supplies and a certain unexplained apprehension that Chinese growth may not sustain have sent out somewhat conflicting messages.

The market faces three kinds of uncertainties at present – uncertainty relating to global economic growth (which has a social dimension), uncertainty relating to monetary policy (an economic dimension) and uncertainty relating to geopolitical events (political dimension).

Admittedly, global growth is still not strong enough to provide a consistently positive demand pull across commodity sectors. So, supply trends and event risks are likely to remain key differentiators of price performance between commodity markets, observed an expert adding that being overweight on oil against underweight base metals would be advisable.

Last week, precious metals fell heavily.

In London, gold was down 3.4 per cent to a weekly close below $1,270 an ounce, while platinum was down 1.2 per cent. Silver was a tad down (-0.6 per cent), but palladium bucked the trend by gaining 0.8 per cent. Oil WTI was down 1.9 per cent over the week.

Base metals were mixed though. Tin was the worst performer with a decline of 2.3 per cent over the week followed at a distance by copper and nickel. However, lead gained 3.1 per cent, zinc 2.4 per cent and aluminium 2.0 per cent.

Interestingly, across precious metals, prices have trended lower. Gold fell to its lowest price in three months amid high volume on CME market and waning investor interest.

There is palpable lack of confidence in the yellow metal’s price performance. The asset failed to react positively to the US debt issue. Any compromise in the US will potentially push gold further down.

Interestingly, in 2011 the metal responded positively to debt debate, rising from $1,500-1,800/oz over four weeks; but has failed to do so now.

On the other hand, US dollar is impacting gold prices. Anticipated strengthening of the greenback is sure to create further downside risk to gold prices.

The yellow metal has dragged down silver and platinum (below $1,400/oz). Belief that gold has run out of catalysts is now gaining ground.

Gold: In London on Friday, gold PM Fix was $1,266, down 2.5 per cent from the previous day’s $1,299. Silver too fell 1.9 per cent to Friday AM Fix of $21.52 versus $21.93 the previous day. Platinum moved down to $1,369 ($1,385), but palladium gained marginally to end the week at $712 ($705).

It is remarkable that precious metals have not benefited from a weak dollar. On the other hand, risk reduction has affected them adversely. Gold prices have been pressurised down without any safe haven buying.

ETP outflows have continued, albeit at a slower pace. All these show clear lack of conviction in the metal. The physical market is not supportive either despite the ongoing demand season in India. Although local prices have fallen below Rs 30,000 for 10 gm, there is no solid evidence of a robust pick up in physical demand. Demand in China after a week-long holiday is also reported to be none too encouraging.

The downside risks to gold prices in dollar terms are evident. Whether the full benefit of the price fall will be available to Indian consumers will depend on the exchange rate.

On current indication, the government is unlikely to loosen its strong grip over gold imports through a web of controls.

According to technical analysis, gold’s momentum is bearish. Resistance is seen at $1,300 and $1,295 while support may be available at $1,245 and 1,210. Having broken below August lows, gold risks further downside as resistance near $1,300 area caps the upside.

Base metals: The general mood among market participants at LME week 2013 suggests a lack of conviction and mixed sentiment. The potential for price appreciation seems to be limited as supply continues to outpace demand.

Experts have pointed out that players are neutral to bearish on zinc and aluminium, neutral on copper, but are becoming more constructive on nickel (given the looming Indonesian ore export ban) while being bullish on lead and tin.

With the copper market moving into an imminent surplus, the question is how big the surplus will be next year. So, copper prices are likely to break below $7,000/t. On Friday, LME cash copper closed at $ 7,177 a tonne, aluminium at $1,836/t and nickel $1,3852/t.

Technical picture suggests that copper momentum is bearish with resistance seen at $7,355 and $7,295 while support is seen at $7,100 and $7,020. Nickel may trade sideways within its range; but may bounce in the near-term with an ultimate bearish bias.

Crude

Given the demand supply fundamentals, Brent is likely to average $105 a barrel this quarter. Events risks for the market appear somewhat faded.

Supplies are fairly comfortable; but the question is whether there would be unanticipated demand strength especially from emerging markets.

(This article was published on October 13, 2013)
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