Agri Business

Geopolitical concerns push gold up; Brent crude oil at $100

| | Updated on: Feb 06, 2011
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Geopolitical issues that were less of a concern last year have returned to haunt the global commodities market in the last few days with turmoil in Egypt the highpoint so far. The latest political developments in Egypt quickly following those in Tunisia and elsewhere have already begun to push commodity prices up.

Crude (Brent) has already breached the psychological $100 a barrel, while gold has regained the magical $1,350 an ounce level as violence in Egypt and inflation expectations in Europe unfold. On the growth front, there is renewed confidence. Data from the US generally point to a positive macroeconomic sentiment emerging. January was another month of commodity price gains as positive demand indicators continued to boost market fundamentals and investor confidence.

To be sure, the latest PMI data point to continuing expansion of industrial output, something that would support base metals and steel demand in the coming months. No wonder, copper, tin and iron ore all hit all-time nominal highs. Bulk commodities showed the greatest gains with supply disruptions providing strong impetus to spot prices.

Going forward, geopolitical concerns, improving macroeconomic situation, investor confidence and weather related supply disruptions are likely to combine to affect the entire commodities complex covering energy, metals and agriculture. Overall, high commodity prices are here to stay. Governments are sure to continue to fight inflation but with limited success.

Ocean freight market continued to decline last week with the Baltic Capesize index falling below 1,300 for the first time since December 2008. Experts believe there is structural overcapacity in the sector.

Gold: After a sedate start to the New Year, gold regained its magical $1,350/oz level last week thanks to geopolitical concerns (violence in Egypt) and inflation expectations in Europe following announcement that the central bank will keep rates low which indicated a continued short-term upward pressure on inflation. Silver rallied to on cue and reversed its loss in January. On Friday, in London, gold climbed by as much as 2 per cent with PM Fix at $1,355/oz as compared with $1,328/oz the previous day. Silver rose even higher at 2.2 per cent on Friday AM fix of $28.91/oz versus the previous day's $ 28.30/oz. Earlier in the week, there were indications that gold and silver were stabilising after dipping towards two-month lows. But good physical demand is said to have materialised on price dips.

The short-term external headwinds that gold was facing may now give way, at least in the days ahead, to a more investor friendly environment under the present geopolitical circumstances. Silver prices take gold's cue but remain volatile given the weak fundamentals. When geopolitical concerns abate substantially, there would be correction. According to technical analysts, in the short-term, the week's price movement is an encouraging upside signal. The market may be building a base over support in the 1,300 area, while momentum is bullishly supportive. A close above 1,350 opens up 1,400 and the 1,432 all-time high.

Base metals: The upward price momentum looks strong, with copper and tin setting new records and the rest of the complex trading multi-year highs. Given the flow of supportive macroeconomic data and tightening market fundamentals, this is not surprising.

As we have pointed out in the past, the world copper market is in deficit this year. No wonder, copper finally closed above the magical $10,000 a tonne mark on Friday. Strong US manufacturing job data boosted sentiment. Base metals are positively correlated to global economic growth. However, the scale and nature of price gains makes the market vulnerable to short-term correction. The market is also waiting for Chinese restocking demand to emerge. Technical analysts see the next target for copper at 10,467.

Crude: The unfolding events in Egypt have injected some volatility and uncertainty in the market. Brent prices have moved beyond $100 a barrel reflecting the increasing sensitivity of the market to geopolitical developments. Coming as its does with strong demand, reduced inventory and less spare capacity, it is critical for stakeholders to stay fully focussed on geopolitical developments that can potentially impact the market.

Published on February 06, 2011

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