The recent price gains in a range of commodities covering mainly energy products and metals have once again raised questions whether the global markets have returned to the so-called commodity super cycle or boom period despite some setbacks and whether the recent performance is sustainable over time.

This quarter so far, commodities have been among the strongest performing assets even as equity markets faced losses. Coming in the backdrop of sluggish global growth and indifferent demand, the price gains are clearly attributable to the risk of supply disruptions, especially in oil.

At the same time, in metals such as gold and copper, bearish positioning has now begun to unwind, point out experts.

Given this, while oil may face upside risks due to the geopolitical situation in the West AsiaMiddle East, the same cannot be said of base metals.

So, current gains in commodity prices have primarily been driven by supply fears and short-term positioning by market participants.

Over the week, base metals faced broad-based decline.

On LME, nickel was the worst performer with a loss of 5.1 per cent over the week to close at $13,725 a tonne followed by aluminium (-4.4 per cent) that closed at $1,766/t, zinc (-4.2 per cent) at $1,869/t and copper (-3.5 per cent) at $7,078/t.

Among precious metals, gold and silver gained 1.2 and 2.5 per cent respectively while platinum and palladium fell 1.6 and 3.3 per cent respectively in the London market.

With Thursday’s more positive GDP data release, the sentiment favoured the US dollar and the metals market prices fell with gold slipping below $1,400 an ounce level.

Going forward, once again, a combination of macro data, geopolitical concerns, risk of supply disruption and dollar dynamics will be key drivers. Beyond the short term, the metals markets – base and precious – face downside price risks. The next meeting of FOMC is scheduled for September 17 when a decision on tapering is widely expected. Should that happen, the dollar is sure to strengthen capping any upside that dollar denominated commodity prices may have.

Gold: A combination of factors – geopolitical instabilities, weaker equity markets and weaker dollar - helped support prices last week, although the physical market is far from helpful and investor interest is not exactly robust. There has been continued short covering rally.

Going forward, with tapering of QE looking increasingly certain, the downside risks to the metal have only increased. Revival of physical demand and ETP inflows could be the only saviour.

Will the Indian market be that saviour? With the harvest season round the corner in tandem with a series of festivals, there is hope that physical demand will revive albeit on a modest scale.

Domestic gold prices have stayed well above Rs 30,000 for 10 gm, a tenth above the recent lows. The rupee has rapidly depreciated (as much as 15 per cent in four months) because of persistent current account deficit.

There are signs of a recovery in the currency value, but any gain will be limited. The rupee is expected to stay above 60 to a dollar, making gold imports so much expensive, in addition of course to 10 percent customs duty. There are reports of increase in unofficial imports, but the authenticity of the reports is unclear.

For gold prices, Fed tapering will be the key driver in the next few weeks. If announced in September, prices could decline by as much as 10 per cent from the current levels and move close to $1,300/oz levels.

For any reason, if the decision is postponed, prices could rally to test $1,500/oz levels.

On Friday, in London, gold PM Fix was $1,395/oz down from the previous day’s $1,408/oz, while silver followed suit with Friday AM Fix of $23.64/oz versus the previous day’s $24.11/oz. Platinum closed at $1,514/oz and palladium $727/oz.

Last week saw platinum prices peaking at about $1,550/oz as speculative positioning has risen 70 per cent since July and 33 per cent in August alone, according to experts who said alongside gold, platinum has benefited from the unwinding of bearish positions.

Demand from the auto sector is said to be picking up.

Base metals: Price rallies seen recently in the complex may have been triggered by expectation of economic stabilisation in China and pickup in demand, but a more critical reason is the extreme short positioning that happened when the sentiment was overly bearish.

Strong supply growth is likely to push most base metals into surplus.

The rally in copper prices has come amid more positive sentiment on Chinese demand but restocking in running out of steam and power grid spending could slow sharply in H2, according to experts, who see a reversal of recovery in copper prices to happen before long on the back of increases in mine supply.

On Friday, LME cash copper closed at $7,078/t while aluminium was $1,766/t.

Crude: Risk of supply disruption has caused price spike. On the back of risks associated with a western military intervention in Syria, the market has rallied.

Additionally, supply losses to the extent of an estimated three million barrels a day in Libya, Iraq and Nigeria are mounting.

The developments on the geopolitical front need to be watched carefully.

(This article was published on September 1, 2013)
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