Developments of recent weeks suggest that fiscal consolidation will most likely be the priority in the advanced countries; and may prove to be a drag on global growth. At the same time, economists argue that given the uncertainties surrounding the near-term growth, and the large slack in the economy, central banks should maintain very loose monetary conditions.

This will have implications on the global commodity markets covering energy products, industrial, base and precious metals and to a limited extent, agriculture.

The week marked broad-based gains across the commodities complex. While most precious metals gained marginally, palladium prices rose by 2.8 per cent over the week to close at $745 an ounce in London. Base metals had a mixed week, but closed strongly on Friday, maintaining the strong price momentum into February. In particular, nickel prices rallied 7 per cent during the week to close at $18,564 a tonne. Oil prices too exhibited strength with front month Brent rising to the highest level since October 2012 on a combination of further positive macro elements as well as an increased stirring of geopolitical noise across various countries in the West Asian region.

In agriculture, there is a churn. As an expert commented, like farmers practice crop rotation, investors have begun to rotate their agriculture commodity exposure.

According to CFTC data, in the last four weeks, hedge funds have aggressively liquidated long positions in sugar, soyabeans, cocoa and wheat; but have been big buyers of soya oil, cotton and to a lesser extent corn. According to analysts, overall sentiment toward the sector has weakened.

Going forward, the market participants are waiting for additional triggers including growth signals, central bank actions, geopolitical developments and of course movements in the Chinese market. Weakening dollar has helped prop several commodities traded in dollar terms; but in the medium term, the greenback looks set to bounce back.

Gold: Waning interest

The yellow metal continues to struggle to gain upward traction. Prices fell to levels last seen in May 2012 in euro terms and tumbled to 2-week lows in dollar terms. Failure to breach the $1,700/ounce mark triggered profit-taking amid improved market sentiment.

Clearly, gold is without near-term structural support from the physical market and remains at the mercy of macro news. On the other hand, silver has garnered significant investor support but is still struggling.

Analysts and gold bulls are jumping from one support system to the other, and the latest they tout is the central bank buying of the yellow metal. While some central bank purchases do take place, these are not large and so not significant enough to drive gold prices higher.

On the other hand, physical demand is still tepid and speculators are beginning to turn wary of the price performance of the metal. Improving sentiment in the equity market will further depress gold price performance prospects. On the other hand, platinum and palladium have performed well so far this year. Their fundamentals are constructive as the market will be in a state of deficit in 2013.

According to technical analysts, momentum is neutral for gold; and the metal is likely to face resistance at 1,700 and then at 1,683 while support is available at 1,652 and then at 1,620. In the near-term, consolidation is likely to continue as dip in speculator buying interest drives the consolidation process. As for palladium, there seems to be case for a bullish move upward next week toward retracement target at 792.

Base metals: bullish

Last week, on the LME, aluminium cash closed at $2,088/tonne and copper at $8,255. In the short-term, there is strong possibility of prices pushing higher in the wake of growing optimism about global growth and related risk-on environment. However, China, the key player, has not exactly been active in the market. For the market to ward off a downside risk, it is necessary that China returns after the New Year holidays.

According to technical analysts, copper momentum is bullish. Resistance is seen at 8,420 and then at 8,380, while support is seen at 8,255 and then at 8,100. Copper breaks bullish and opens target at the prior highs at 8,422 with a close above the nearby peaks at 8,256. Aluminium too is pushing higher. There is reason to remain bullish at 2,200 where one could look for signs of weakness. The medium term outlook is said to be neutral.

Crude: on a high

Front month crude crossed $115 a barrel last week to achieve a fresh multi-month high. The market fundamentals are supportive.

Another energy commodity coal may be poised to go higher owing to looming supply issues from industrial action and adverse weather in producing regions.

(This article was published on February 3, 2013)
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