Gold may move lower; copper, tin outlook bullish

Across the metals complex, and more particularly in the precious metals segment, prices softened last week. While gold and silver hit two-month lows, base metals fluctuated following a combination of lingering growth concerns, tightening bank credit and of course sovereign debt issue that refuses to go away.

Commodity markets are widely expected to remain volatile. While the emerging scenario for commodities is positive overall, divergent monetary policies pursued by central banks of different countries, fears over the adverse effects of rising food inflation and elevated crude prices are seen continually affecting the sentiment.

The emerging economies are worst affected by inflation as a result of which central banks are regularly tightening bank credit. China and India are two prime examples. Trade and tariff policies are being tweaked in order to augment supplies and rein in rising prices. Weather too is playing truant in different parts of the world creating supply uncertainty and price volatility. The debate over how far liquidity reduction will impact commodity prices is likely to continue. As the appetite for consumption is high in emerging economies, rising cost of money may, at best, have a marginal impact. In other words, insofar as Asian emerging economies are concerned, the trade data present little room for bearish outlook.

As for investment in commodities, 2011 may be yet another year of strong flows, increased investor participation, gradual shift towards active strategies and more tailored commodity exposure, along with dynamic approaches to take advantage of curve shapes, commented an expert. Key themes would include a slowdown yet robust investment flows with institutional investors dominating and high level of interest in physically-backed commodity products. Stricter regulation of the market cannot be ruled out though.

Gold: The precious metals complex was under pressure last week. Prices of gold and silver fell with the yellow metals losing 1.8 per cent week-on-week in dollar terms. On Friday, in London, the PM Fix for gold was at $1,319 an ounce, down 1.2 per cent from the previous day's $1,335/oz. Silver followed suit with Friday AM Fix at $26.68/oz, down 2.6 per cent from the previous day's $27.39/oz.

Gold is facing short-term external headwinds. Investor interest is seen easing. Less-committed longs have exited. Inflows into ETP are slowing. In the bourses, gross speculative shorts are at 5½ year high, providing a strong indication of the mood. The market has the potential to move below $1,300/oz to the $1,250-1,275 area.

At the current dipped levels, physical demand has reportedly materialised. With prices well below the psychological Rs 20,000 per 10 gram in the Indian market, any approach towards Rs 19,000 would provide a good buying opportunity. However, notwithstanding the current weakness, the longer-term investment climate is seen positive for gold.

Silver continues to piggyback on gold. But with weak fundamentals, silver is more vulnerable to a sharp price correction in the event gold eases further. Simply put, expect volatile conditions to prevail in the precious metals market. Quick entry and exit strategies are called for.

Technical analysts see the ongoing weakness in gold as a dip within bull trend. A move towards 1,300 would provide buying opportunity, they assert. In silver buying interest at 26is expected to underpin.

Base metals: Over the week, in the world market, prices were up across the board with the macro data throwing no negative surprises. However, for the short-term, the underlying sentiment is far from bullish as monetary tightening, rising inventory levels and seasonal lull in buying are holding sway. Many see the recent pullback as a healthy correction.

Copper and tin are two metals with high upward price potential. Copper market deficit for 2011 is estimated at 822,000 tonnes, nearly double the deficit in 2010. Copper has the potential to breach $10,000 a tonne. Nickel is also a favourite with expectations of stainless steel expansion. Demand conditions are robust with renewed interest in OECD and of course, the emerging markets. Chinese restocking demand, as and when it emerges, is expected to spark the next base metals rally.

Technical analysts see all-time highs for copper in the short-term. The record high of 9,781 may be breached. Strong support is seen at 9,250 with buying interest near 9,400. Aluminium too enjoys an upside potential in the short-term. A break above 2,541 will open up higher target of 2,700.

Crude: The market is behaving anomalously. With Brent hovering around $100 a barrel, WTI continues to dislocate with prices reflecting fears of localised distressed crude. WTI has once again become decoupled from both international market and other regional US markets. Its discount to Brent has reached record levels. Experts assert that the weakness in prompt WTI is not justified on a fundamental basis and prices are likely to come back in line. However, such distortions are likely to become more frequent and profound in 2011. Globally, demand conditions are robust.

COMMENT NOW