Global commodity markets are at a crossroads. On the one side is a high road to expanded demand and improved price performance, while on the other is a low-road to tepid demand conditions and range-bound or falling prices.
It is as yet uncertain which direction the market will take. Monetary policy of major economies and global growth prospects will continue to impact commodity markets.
Continued sluggishness in global economic growth despite some pick-up signals suggests that the recent jump in prices of oil and some base metals such as copper may not sustain unless the growth momentum gathers pace decisively.
The recent upswing in Chinese economic activity has generated some cautious optimism; yet there is no guarantee that most of the emerging markets will not slow down.
“The global economy is still stuck in a low-growth, low interest-rate environment, which is part of the economic cycle when commodity prices struggle to make consistent gains”, observed a perceptive analyst.
China has often been the swing factor in the world commodity trade. The Asian major is showing signs of improved economic activity; but that alone may not be enough to sustain a larger commodity price play. Deferment of the Fed tapering has, of course, provided a temporary reprieve to markets and prices. Gold has been a significant beneficiary. However, it is only a matter of time before tapering begins.
Reduced liquidity is sure to pressure commodity prices down. In case of crude, easing of geopolitical tensions will inevitably lead to retracement of recent price gains; but the fundamentals look constructive with reduced supplies and improving developed market demand.
At the same time, in most base metals, the market is moving into a state of surplus with improved supplies exerting their own price effect. So, for metals like copper, selling into rallies may be advisable.
The last quarter of this calendar is loaded with uncertainty in terms of economic growth prospects, monetary policy changes, geopolitical developments and related issues such as currency.
With tapering still several weeks away, the dollar will most likely stay weak in the near term. Dynamics of the broader markets will impact commodities. Agricultural markets are an exception. With rebound in production after three years of weather-induced supply shortfalls, 2013-14 is likely to witness softer prices, improved demand and inventory building.
Reflecting the uncertain times, commodity markets put up a mixed performance last week. In London, all precious metals were down over the week with silver the worst performer losing as much as 5.1 per cent in value, followed by platinum with a 2.1 per cent price decline. Gold edged lower by 0.6 per cent, while palladium stayed nearly unchanged.
The base metals were generally up except for nickel (-0.4 per cent). Aluminium and zinc outperformed with 2.3 per cent and 2.0 per cent gains respectively. Oil WTI was down 2.7 per cent following easing of tensions.
Gold: Fed’s decision to put on hold QE tapering has provided some respite to the yellow metal as the downside pressure eased. However, price gains spurred by announcement on September 18 to defer tapering were soon given up as the market participants realised that the reprieve would be temporary. Last week, prices stayed in a range in the vicinity of $1,300 an ounce. Gold continues to remain rather lucky with something or other happening to keep interest in it alive. Now, the upcoming debt ceiling debate in Washington has scope to add to the upside risks, commented an expert.
In London on Friday, gold PM Fix was $1,341/oz, up from the previous day’s $1,333/oz. Silver was, however, down to Friday AM Fix of $21.61/oz versus previous day’s $21.97/oz. Platinum moved lower to $1,416/oz ($1,424/oz) and palladium stayed virtually unchanged at $725/oz.
The dollar is likely to remain relatively weak in the near-term, a factor that will support gold prices in dollar terms. Additionally, central banks have remained net buyers in August. However, investor appetite remains uncertain. ETP holding have continued to be drawn down.
With the rupee firming slightly, gold futures in India have eased slightly to around Rs 30,000 for 10 gm. It is reported that some banks have begun to import gold after a gap of two months when import conditions were less clear.
With satisfactory farm harvest and festival season, physical demand is set to improve. If the rupee remains relatively stable, local prices of gold will also likely stay range-bound. Silver prices have been under downward pressure in recent times. Admittedly, the market is in a state of surplus.
Mine supplies are said to be growing. Importantly, silver being mined as a byproduct during the mining of lead, zinc, copper and gold, expectation of an increase in the production of the latter metals in 2013 and 2014 will result in improved silver availability. According to technical analysis, gold momentum is bullish. Resistance is seen at $1,375 and $1,355 while support may be available at $1,310 and $1,290. A break below $1,305 in gold will signal lower toward $1,290 and then the $1,270 area.
Base metals: With the upcoming LME week in London, the complex is awaiting a clear direction.
While global growth signals are turning positive, they are not yet strong enough to drive demand; but supplies are rising for sure.
Large commodity consuming emerging markets have to demonstrate more appetite for consumption. So, until macro data turn really positive and stay that way for a sustained period of time, the complex is sure to face downward price pressure. Any price lift could only be short-lived.
The one exception could be tin whose fundamentals justify a rally as the market is in deficit. Buying tin on dips is advisable, while copper fundamentals are sluggish and selling rallies above $7,500/t would make commercial sense as the market moves into surplus.
On Friday, LME cash copper closed at $7,286 a tonne, aluminium at $1,794/t and zinc $1,907/t. Nickel ended the week at $13,917/t and tin $23,350/t.
The technical picture suggests bullish copper momentum. Resistance is seen at $7,535 and $7,370 while support may be available at $7,110 and $7,020. As for tin, support near $22,700 helps an uptick toward $24,000.
Crude: The easing of geopolitical tensions and price retracement has brought some stability to the market. In the last quarter of the year, while supply shortfalls ease, demand is likely to recover from the current levels.
Brent prices can be expected to trade around an average of $105 a barrel.