Global commodity markets last week faced positive price action amid an environment of continued uncertainty in the external markets. There are early signs of some progress in the eurozone debt crisis. One of course has to wait and watch for solid evidence. To be sure, the growth concerns have not faded. Importantly, on November 30, China's central bank cut the reserve requirement ratio of its commercial banks by 50bp, effectively reversing the policy of monetary tightening started two years ago.

 There is reason to believe, the Chinese authorities are now worried about growth. The decision will, of course, have a lagged effect on the markets; but it has surely come as a positive measure boost to the sagging sentiment seen in the metals space. Central banks around the world are now engaged in a coordinated action to boost liquidity in the financial system.

 Most commodity markets felt the positive effects of these developments. The entire metals complex gained strength. All base metals, except tin, rose week on week, while all precious metals rose too. The crude market gained, but more because of geopolitical headwinds that haunt the supply side.

 Interestingly, amid this incipient euphoria, prices of major agricultural commodities have come under intense pressure following a relentless sell-off. Speculators have liquidated their positions substantially as evidenced by declines in CFTC non-commercial positions. Investors have turned wary of the ongoing European debt crisis and health of the global economy.    

 In the weeks ahead, external markets, attitude towards risk and views on global economy are likely to dominate as market drivers. As for crude, there is a clear tug-of-war between tightening market fundamentals and weak sentiment caused by economic adversities that threaten demand especially in the industrialized economies.

 As for base metals market, currently the biggest downside risk is the potential for contagion to spread from Europe. Concerns over the Chinese economy – whether China will face hard-landing or soft-landing – have not gone away. With the potential for inflation to begin to heighten, gold is likely to enjoy investment support. Some of the major agricultural commodities such as cotton and sugar are expected to trade lower in the wake of solid production gains and concerns about consumption growth.

 Overall, the only mantra for market participants is ‘caution' at least for the time being.   

Gold: All precious metals were up last week with palladium turning out to be the star performer making a solid 14.2 per cent gain. Silver gained 6.1 per cent week-on-week and gold 3.5 per cent. The downward momentum in prices seems to have been reversed last week as the dollar weakened amid collective central bank agreement to increase short-term liquidity. With easing interest rates, inflationary environment threatens to build.

 No wonder, gold prices increased to the mid-$1,700 an ounce last week. Week-on-week, gold prices increased 3.5 per cent. In London, on Friday, gold PM Fix was at $ 1,747/oz, slightly down from the previous day's $ 1,752/oz. As usual silver piggybacked on gold. Silver AM Fix for Friday was $ 33.15/oz from the previous day's $ 33.28/oz.

 Investment demand for gold remains strong. ETP inflows in November were twice that of inflows in October and currently stand at record high. Central banks net buying continues steadily. The picture is constructive. While physical demand driven by seasonal factors should support the downside, investment demand aided by inflationary pressures and growth concerns have the potential to drive prices higher. Given the favourable backdrop, the view on gold is positive.

 The Indian market is currently facing the double whammy of rising international gold prices and a considerably weaker rupee. Retail demand is turning softer with consumers in no mood to make physical purchases. Seasonal demand factors are currently supportive, but may fade in the near future.  

 The technical picture is gold supportive. The metal continues to make new highs and a close above 1,750 will open up the November highs above 1,800. The medium-term outlook is bullish. Silver will continue to track gold, but weak fundamentals make it highly vulnerable to downside corrections.

  Base metals: The complex made significant gains last week with copper and zinc standing out with gains of 9.1 per cent and 7.9 per cent respectively. Copper closed the week at $7,863 a tonne on LME. Tin of course was an exception with a fall of 3.7 per cent over the week.

 Looking at changes in open interest and prices over the last week, analysts assert that new long positions have been built in aluminium and copper while lead and zinc have seen short covering.

 With China reversing its credit tightening cycle, there is renewed hope in the global commodity marketplace. There is great expectation that the Asian giant will become counter-cyclical to weakness elsewhere in the world. China will remain the focus of global attention the whole of 2012. European demand weakness has already been priced-in. Any further downside surprises have to come from China. The base metals complex is still vulnerable to correction if it suffers bouts of macroeconomic pessimism.

 Despite constructive fundamentals, according to technical analysts, copper is likely to struggle ahead of resistance at 8,280 target. Aluminium found resistance at 2,158; and an upside toward 2,200 can be expected before looking to return to the bear trend.

  Crude: With geopolitical headwinds haunting the supply side and demand side looking fairly robust, especially from non-OECD regions, crude market is gaining ground. For instance, Indian oil demand posted robust growth coming in at a record high for October. The positive environment is supportive of prices at the current levels. In some sense, the market is in a state of equilibrium, albeit ad hoc, with increasing sensitivity to the upside from a further escalation of geopolitical instabilities. Of course a sharp reaction to macroeconomic calamity cannot be ruled out either.  

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