Gold and silver extend gains on geopolitical fears

Impacted by demand-supply fundamentals and non-fundamental factors that include geopolitics, currency and monetary policy, the global commodities complex covering energy products, metals and agriculture is moving in different directions. Each commodity group has its own orbit, as it were.

Agricultural commodities are currently the most watched simply because of elevated prices of cotton, corn, wheat, sugar and vegetable oil. Last week, cotton breached the critical 200 cents a pound barrier to set a fresh all-time high. As for crude, while political tensions are keeping the market on the boil, WTI prices are depressed due to inventory position in the US and the differential with Brent is at record level.

Some of the base metals have set new landmarks this year; yet they seem to be buckling under some pressure from China's continual monetary tightening the latest of which was the last week's announcement that reverse rate ration will be raised by 50 basis points on February 24. On the other hand, construction activity in the Asian giant is going on apace which has supported the metals market rather well. The question is if China were to slow, will the rest of the world step in?

In precious metals, gold and silver have made gains on the back of geopolitical concerns and return of investor interest, although physical demand has taken some beating. How long the interest will last will of course depend on factors such as macroeconomic data, state of geopolitics, monetary policy and equities market.

So, the sense one gets is that the global commodities markets are at the crossroads, and seemingly buffeted by conflicting signals. However, there is increasing evidence that growth is returning to the global economy and that is a big boost especially to growth commodities such as energy and industrial metals. In the event, investor interest in gold and silver could wane.

Gold: Geopolitical concerns have once again attracted investors to gold and silver both of which extended their gains last week. While gold reached the highest level since mid-January, silver reached a fresh-high since March 1980. World Gold Council report suggested a strong revival in demand in 2010, not only from investors but also from jewellery sector. India was the largest growth market despite record prices.

On Friday in London, the gold PM Fix was at $1,384 an ounce, up 0.3 per cent from the previous day's $1,379/oz. Indeed, silver spurted sharply with Friday AM Fix rising by a whopping 4.3 per cent to $31.94/oz from the previous day's $30.61/oz.

Experts point out that Comex net fund length is on the rise; and after hitting its lowest levels since May 2009, it has risen to a one-month high. Net redemptions across ETP holdings have slowed. There is cause to remain optimistic about gold prices because of the favourable climate – low interest rates, currency debasement, inflation expectation and of course unabated geopolitical fears. Silver prices continue to ride on gold's back but also continue to remain vulnerable to sharp correction because of weak fundamentals. One can expect continued volatility.

Base metals: The performance of the complex was somewhat mixed in the international market. Copper fell 1.1 per cent over the week and underperformed on Friday. Exchange stocks in China and elsewhere expanded. On the other hand, aluminium rose by 2.6 per cent over the week to its highest levels seen before the 2008 crisis with stocks falling. There is expectation that aluminium stocks would continue to be drawn over the coming month.

Nickel was stronger over the week, up by 3.0 per cent to $29,123 a tonne. Demand for nickel and ferrochrome is rising as a function of strong stainless steel production, notably in China. Analysts assert that Chinese stainless steelmakers use a high proportion of primary raw materials than in other producing regions since stainless steel scrap is less-readily available. Spot market prices are rising and are anticipated to move up by $100-200 a tonne.

Positive signals of global economic growth have brought to the market a new found confidence. However, growth concerns have not fully faded. There is lurking fear of slowdown in the wake of continued tightening monetary policy of major emerging economies. Changes in inventory levels may provide cue to market development. Slowdown in Chinese buying may provide a short-term downside risk to prices. Caution is necessary.

Crude: Geopolitical concerns and unabated uncertainties in the Middle-East North Africa region have kept the market well supported in addition of course to tightening market balances. Data suggest improving demand conditions.

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