Global commodity markets, nay almost all asset markets, are currently in a state of turmoil, buffeted by negative sentiment and lack of confidence about growth. Risk aversion has come to the fore. Worsening Euro zone crisis and lack of clear path forward has meant that uncertainty will continue for some more time. Adding to the choppy sentiment is China's economy which shows signs of slowing, if the April trade data are anything to go by.

So, risk aversion, macroeconomic uncertainty and a firmer dollar have combined to pressure the markets down. As punters sell-off and exit commodities over demand concerns, prices are under downward pressure. Little wonder then that week-on-week, prices of most commodities – crude, all precious metals, most base metals and many agricultural products – declined. Gold fell 1.3 per cent and silver by a modest 0.8 per cent. In the base metals complex, nickel, tin and zinc gained and other lost. In line with the rest of the commodities complex, agricultural prices fell over the past week with sugar and coffee prices notably dropping to 21-month lows.

Choppy behaviour will be the market's main feature. Sustained flow of positive macro data is critical for the market participants to gain confidence. While it certainly is time to be cautious, it is not the time to go short. Commodities with tight fundamentals are the ones with potential for price performance when the situation normalises.

Gold: The entire precious metals complex continues to face price correction driven by European political uncertainty and dollar strength. Admirable performance of the greenback vis-à-vis the euro is weighing on prices, especially gold. In the near-term, the yellow metal will continue to face the dollar pressure. It can get worse, if the euro were to weaken further.

At the same time, physical demand is not forthcoming. The world's largest gold consumer, India, is currently facing a rapidly weakening rupee which negates the advantage of a price fall in dollar terms, keeping imported gold expensive in the domestic market. Consumer resistance to high prices is stark. In the world market, the silver lining for gold is the resilience of ETP holdings. If outflows begin there, prices have the potential to collapse.

In London on Friday, gold PM Fix was at $1,570 an ounce, little changed from the previous day's $1,569/oz. Silver AM Fix was $28.24/oz on Friday, edging up from the previous day's $ 28.08/oz.

Base metals: In line with other markets, this complex has been under pressure for some time with a huge sell-off. LME cash copper was $ 7,671 a tonne on Friday, while aluminium was $ 1,976. Ongoing global growth concerns with focus on Europe and China have provided the trigger for many participants to exit their long positions. At the same time, zinc, lead, nickel and aluminium prices have the least downside from the current levels given the proximity of prices to the cost curve, observed an analyst.

If the expectation that global growth momentum and especially that of China will pick up in the second half of the year is realised, base metals prices have the potential to strengthen. Copper will of course be a major beneficiary as the market is in a state of deficit. In the event, current price dips will provide good buying opportunity to position for strength in H2.

Crude: The fortunes in the market hinge on the fate of Iranian negotiations. Should diplomacy fail conclusively, geopolitical tensions can mount once again. Prices are declining because of weakening macroeconomic sentiment despite improving fundamentals. Demand is improving and the market is in a state of balance, but not in surplus.

>gchandra@thehindu.co.in

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