Breaking away from the liquidity-driven price performance of the last ten years, global commodity markets appear to be poised for major changes that could well usher in an era of tepid price performance and assertion of market fundamentals.

In the event, investor interest will wane further. This is becoming increasingly clear from the developments of the last few weeks.

Most important is that the risks of a China hard-landing are rising. Market participants perceive a sharp, even if temporary, slowdown in growth and investment in the world’s rapidly growing significant economy. Surely, this has serious implications for commodity demand as well as commodity prices.

The voracious appetite of the Asian major for commodity consumption – energy products, all metals and agriculture – is too well known for recounting.

At the same time, major changes are on the horizon in the United States. After several quarters of limited jobs growth, more Americans are now finding work.

This is sure to support the notion that the Fed QE tapering will begin to take effect probably in this third quarter. No wonder, the dollar index rose to its highest level in three years while gold and silver plunged, an expert commented.

Continuing the trend of the previous two months, June too found prices of most commodities – especially exchange-traded metals – were pressured down on the back of QE tapering expectations and China banking concerns. Month-on-month, most metals were down with nickel the worst performer at -5 per cent followed by copper -3.5 per cent.

All precious metals were down even as gold plunged. At the same time, strengthening dollar and falling inflation prospects in developed countries hit gold and silver hard.

Gold: losing sheen

With equity markets improving steadily in a risk-on environment and liquidity expected to be gradually sucked out after a hawkish Fed response,Geopolitics has returned to haunt the oil market as events in Egypt raise concerns over the strategically placed Suez Canal for movement of crude to Europe and other destinations.

Gold prices have come under renewed pressure exacerbating the decline seen over the last 10-12 weeks. Last week was no exception. In London, on Friday gold PM Fix was $1,213 an ounce, down 3.1 per cent from the previous day’s $1,252. Silver too has been under pressure and Friday AM Fix was at $19.32 versus the previous day’s $19.57/oz. Extending its premium over gold beyond $100/oz, platinum closed at $1,327 while palladium closed at $669.

Physical demand for gold is far from satisfactory even at current relatively low prices. Demand from India is muted as the rural folks are busy with agricultural operations and may return to the market come September.

ETP outflows continue and with every fall in price, cash-negative ETP holdings rise which in turn makes the metal vulnerable to further downside price risk. Investor interest is low too. Speculative positioning has fallen to its lowest level since June 2005 on Comex with gross shorts also at a record high. Silver market is in surplus and given the lack of industrial and investor support, it is most exposed to the downside in the near-term.

Metals: Risky

Fears of China’s slowing growth rate and hard-landing currently haunt the complex. According to experts, copper is the metal that is most at risk as even at present prices are trading at a premium to operating costs. Investors are sure to see Chinese hard-landing as a sell signal. In the bourses, the overall positioning is net short in copper.

Other metals such as lead are in no better position. However, the potential downside for aluminium is a lot less.

On Friday, LME cash copper closed at $6,783 a tonne and aluminium at $1,724. According to technical analysis, copper enjoys support at 6,730 and then 6,600 while resistance is seen at 7,200 and 7,000. Uptick in aluminium towards 1,850 looks unpromising a move below 1,755 leads to downside toward 1,600.

Crude: May slip

Even as geopolitical uncertainties emanating from events in Egypt are being closely watched, slowing Chinese economy is a cause for concern on the demand side.

Global demand fundamentals are still relatively weak and the market faces downside price risk. Geopolitical instability is seen supporting prices rather than providing a significant upward catalyst, asserted an expert.

(This article was published on July 7, 2013)
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