Bullion looks bullish, so are base metals and crude

G Chandrashekhar Mumbai | Updated on April 17, 2011


There are positive signals on the global economic growth front. The OECD composite leading indicators suggest continuing growth momentum. Importantly, the US economy has now added jobs for six straight months and the unemployment rate has declined to a two-year low. China's GDP growth reached 9.7 per cent in Q1 of 2011 which will be positive for physical commodities demand.

Despite these developments there are concerns. High oil prices remain a worry for all major economies especially those dependent on imports. Inflationary pressures are building up. Continued tightening of monetary policy by some of the major emerging economies is still weighing on short-term outlook for commodities.

Globally, for commodities, last week was full of choppy price action. The fear of demand destruction through exceptionally high oil prices has impacted the oil market, although demand numbers have so far been robust. Uncertain conditions helped bullion. Gold and silver were up week-on-week.

We need more clarity on the geopolitical situation, effect of Japan's natural calamity and possible responses to gradually building inflationary pressures. There are some markets where the prospect of price performance is good – most base metals for instance. It would be advisable closely follow the fundamentals and buy on price dips to build a long position as prices are set for a spike when the dark clouds clear.

Gold: All precious metals prices rose on Friday as the dollar weakened against the euro, equity markets settled mostly unchanged and oil prices edged higher. In the London market, silver spiked by a whopping 4.8 per cent to $ 42.61/ounce (AM Fix) which experts remarked was for no fundamental reason. Gold gained 0.8 per cent to move up to $ 1,477/oz (PM Fix). Over the week as a whole, however, the picture was mixed, with silver and gold up but platinum and palladium down.

Inflation fears coupled with market uncertainty are clearly driving gold higher. Gold ETP holdings have seen inflows in April so far. Retail sales are said to be robust. Belief is gaining ground that both gold and silver are poised to move higher with the supportive environment.

According to technical analysis, gains through 1477 open the initial target in the 1500 area as gold makes new all-time highs. Silver broke above the 42-range and an extension can be expected towards 44 and then the all-time high of 48. All the price action is despite the metal's unfavourable fundamentals. Medium term outlook for gold and silver is bullish. It must be clarified that retail investor demand is currently strong. Once it wanes, there could be sharp correction.

Base metals: Most LME base metals prices finished the week with gains in trading on Friday, although copper was broadly unchanged on the day. While tin rose 2.8 per cent to top $ 33,000 a tonne, aluminium added 2.1 per cent. Over the week as a whole, most base metals prices fell, with lead losing 7.1 per cent. Aluminium and tin were broadly unchanged.

While the market seems to be concerned about the micro picture and short term outlook (in the wake of apprehended Chinese slowdown, high crude prices, monetary tightening and so on), the bigger picture is clearly turning positive, something that one can ignore only at one's peril. As one expert pointed out, although headwinds have strengthened and global growth is slowing, metals consumption is still growing.

The metals specifically to watch out for price performance include lead (supply constraints due closure of world's largest mine), and copper, demand for which is positive across the globe.

The technical picture too is positive. Although copper has been a relative laggard, it has the potential to eventually gain to move towards 10,500. Aluminium and tin are also likely to break their recent range highs.

Crude: The market continues to trade at elevated levels with uncertainties abound. On current reckoning, the prospect of a downward correction looks unlikely anytime soon. The technical picture also supports moves higher. June Brent crude is building support over 117/118. One can look for a break above 125 to target 130 and then 142. Overall, the outlook is bullish.

Published on April 17, 2011

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