Gold still favourite; copper attractive buy

G. Chandrashekhar Mumbai | Updated on May 29, 2011 Published on May 29, 2011

Shining bright: Gold and silver are on an upward trajectory aided by haven and retail demand.

The recent decline in commodity prices following a spate of sell-off has raised doubts about the sustainability of high market prices.

While growth concerns have surely not gone away and inflation is a threat, the pattern of demand and consumption in recent months as well as supply-related uncertainties suggest tightening market fundamentals in a number of cases and constructive physical market indicators.

China's trade data for April help disabuse the concerns over slowing and provide a strong indication of continued growth. Oil imports by volume have been robust with April recording third highest-ever arrivals. Given the precarious power situation, Chinese oil (diesel) demand may turn out to be far higher than initially anticipated.

Investors, especially the committed longs, are most likely to continue to stay with commodity investment as a diversification strategy.

The upside price potential of commodities such as crude and copper are already known.

Geopolitical instabilities that cause supply uncertainties of crude have not dissipated. The possibility of the situation worsening cannot be ruled.

Copper market is in deficit this year and the recent price declines provide an excellent buying opportunity. Chinese demand is improving. The market has the potential to test $11,000 a tonne in the second half of the year.

It is important to continue to track changes in market fundamentals. Currency gyrations and monetary policy changes around the world are also exerting their influence on the commodity market.

Despite recent downward pressure, gold holds the potential to bounce back in the third quarter with most of the supportive factors still in place. As for agriculture, weather is a critical driver. Given weather concerns, especially in the US, it would make sense to remain positive about corn and wheat prices.

Gold: Prices have gained some traction in recent days. Safe-haven investment status of gold is reaffirmed even as unresolved European sovereign debt issue, inflation concerns and fears over slowing growth boost fund flow.

Long term investors continue to favour the yellow metal. ETP inflows have been healthy. Physical market interest supports gold at every price dip.

Price movements in silver, on the other hand, had actually defied the fundamentals when the market reached an unsustainable 31-year high. Retail demand based on wild expectations drove prices higher. What followed was understandable. Silver market is in a state of surplus. ETP outflows continue.

Base metals: The complex is buffeted by conflicting signals.

Prices have been on an upward trajectory buoyed by strong Chinese demand and tightening fundamentals in some cases, but at the same time growth concerns are rearing their head.

Copper in the short-to-medium term and aluminium in the long term provide excellent upside potential, while zinc and nickel with softer fundamentals are unlikely to be star performers.

Crude: Both WTI and Brent are seen stabilising. However, there is nothing to change the fundamental outlook which is still constructive.

Geopolitical uncertainties, strong growth in OECD as well as emerging market demand and slowing non-OPEC supplies currently characterise the market.

Published on May 29, 2011

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