Huge volatility in gold and silver; base metals subdued

Last week saw the unusual rollercoaster ride of commodity prices continuing for the second week in a row. The market was buffeted by a host of factors including stronger dollar (1.41 to a euro), re-emerging macro-economic concerns and risk reduction, all of which dragged prices down. Notable among the losers was copper which declined to levels not seen since December last year. Silver prices yo-yoed, but the pressure downward was unmistakable.

Interestingly, stronger-than-expected EU growth numbers helped bring some stability to volatile price movements. The latest OECD composite leading indicators point to a slower or stable pace of expansion in most EU countries and continued expansion in North America, China and Russia.

The cycle of monetary tightening in China continues. Last week, the Asian major raised the reserve ratio by 50 bps. It was the eight time since October 2010. Demand, however, remains solid. It is possible, in the short-term, China may de-stock some commodities, mainly metals, and begin to restock when prices move to attractively low levels.

The global marketplace is still faced with a lot of uncertainties even as geopolitical tensions continue. Monetary tightening in some countries co-exists with the loose money policy of some others, especially the US. These are unusual times when bull and bear pressures tear the market apart.

So, until stability returns, it would be prudent to exercise caution in taking positions in the commodity market. In many cases, fundamentals will begin to reassert themselves sooner rather than later. We have seen it happen in silver which is in surplus, and same will happen to copper which is in deficit. Price declines of the recent days provide excellent buying opportunity in many commodities including copper.

Gold: All eyes are on silver whose prices exhibited tremendous volatility last week. There was a huge sell-off as speculative longs liquidated their positions. However, the market regained some lost ground. In London, on Friday, silver AM Fix was at $36.20 an ounce, up 11.4 per cent from the previous day's $32.50/oz. Gold was, of course, lot more muted with Friday PM Fix at $1,506/oz, up 1.1 per cent from the previous day's $1,490/oz.

It is common knowledge that the world silver market is estimated to be in a 5,000-tonne surplus this year. From the unsustainable high levels the market went to, it was only a matter of time before it corrected. The trigger came in the form of hikes in margin requirement. The volatile nature of investment demand showed that prices of silver above $40 /oz ultimately lacked fundamental support, asserted an expert. Clearly, caution is must as far as silver is concerned as prices will remain dicey going forward. High prices unrelated to the fundamentals compress industrial demand.

As for gold, the conditions are turning favourable for prices to move higher in the long-run (three months) when high levels of inflation in the US and Asia may pull the metal out of the present short-term ditch. Platinum demand and supply numbers are constructive. The market is in deficit this year and there are risks to supply.

Base metals: The complex has been under pressure and it mounted after the eight round of credit tightening by China last week. While most metals fell, zinc outperformed with a 0.6 per cent rise on the week. Zinc mine supply is reportedly coming under pressure at the current price levels (LME cash $2,135/tonne). With the physical market still tight, the risk-reward is skewed to the upside, according to analysts.

The latest sell-off in copper (LME cash $8,770/tonne) is rather unusual as demand conditions are robust. But it provides market participants a good buying opportunity. World copper market is in deficit in 2011. The price dips are likely to be temporary. The raw material supply for tin market looks tighter. Aluminium has held up well in the face of selling pressure. Rising energy costs and China's energy situation during summer months (energy rationing) deserve to be watched. These are supportive factors not only for aluminium but also for lead and zinc.

Crude: Prices have remained volatile, but the underlying fundamentals remain robust. There are creeping concerns of demand destruction. There has been no marked change on the supply side. WTI moved below $100 a barrel while Brent stayed at $110. OPEC's next meeting scheduled for June 8 is keenly awaited.

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