Gold fades, silver slides; copper set to move higher

After the sell-off during previous week, global commodities market witnessed a slight rebound in prices last week following the parliamentary approval of Greece's austerity measures. While oil prices recovered, base metals registered strong gains.

Precious metals gold and silver slipped, while the bearish USDA acreage and stock report pushed corn (maize) prices down taking wheat and soyabean along.

The June instalment of the PMIs provided comfort for the nervous market, an expert commented adding the US PMI surprised by rising in the month, while Chinese data showed a welcome combination of slowing (not crashing) growth and moderating price pressures.

Despite these developments, uncertainties in the financial market have actually worsened. There is outflow of investment from commodity market. As much as $7 billion from commodity market investment was withdrawn during May, a trend that is causing anxiety. De-risking is currently turning out to be the norm. Stricter regulation of the derivatives market including tightening margin requirement is seen impacting the investor sentiment.

Concerns over global growth, inflationary expectations and currency market dynamics are sure to continue to underpin commodity price movements. Weather is a huge uncertainty for agriculture. In the event, caution is advisable.

Gold: Although the yellow metal continues to hover around $1,500 an ounce due to seasonal demand weakness, the precious metals complex showed mixed performance last week reflecting the overall mood of the commodities market. Gold and silver slipped by around 2-2.5 per cent through the week, while platinum and palladium rose. On Friday, in London, gold PM Fix was at $1,483/oz, down 1.5 per cent from the previous day's $1,506/oz.

Silver followed suit, with Friday AM Fix at $33.85/oz, down 3.3 per cent from the previous day's $35.02/oz. Despite short-term weakness, gold continues to find support from a broader positive external environment. Investor interest is key to price movements. If investor interest wanes, prices will come under pressure, albeit temporarily. However, at lower prices physical demand will be supportive.

On the other hand, silver prices are struggling to find traction upwards because of weak demand-supply fundamentals. The silver market is in a state of surplus in 2011. There is outflow of metal from ETPs. Over the month, barring exceptional circumstances, gold is likely to trade in a range of $1,450-1,530 an ounce. According to technical analysts, as gold has broken below 1500, one can look for support near 1460 to provide a base. As for silver, a break below 33.25 confirms a dip towards the 32 area where buying interest can be expected.

Base metals: Gains were witnessed last week. Copper was the star performer with a rally of 4.4 per cent week-on-week. Zinc was even better with 4.9 per cent gain over the week. Overall, as growth commodities, the entire complex is currently influenced by macroeconomic concerns. While the demand side is clearly growth-led, the supply side is becoming increasingly diverse in the base metals complex which in turn can result in divergent price performance in the months to come.

In case of copper, there is belief that the supply side is tighter than what the market perceives, while Chinese demand is strengthening. It is of course well known that the global copper market is in deficit in 2011. So, dips in prices should provide good buying opportunity. Aluminium prices are drawing strength from rising production costs and demand growth. Zinc and nickel may remain under-performers. Technical analysts assert that as copper has closed above 9400, one can look for further gains towards 9600. On the other hand, aluminium needs to break above nearby resistance at 2560 to confirm further upside to target the 2600 area. Medium term outlook is bullish.

Crude: Despite recent sell-off following IEA's intervention, the market is now beginning to once again take cognisance of robust fundamentals. Will supplies be enough to meet rising demand is the question to which everyone is seeking an answer. However, concerns over inflation and regulatory interference cannot be dismissed lightly.

Fundamentals will assert themselves. The technical picture is that a close over 93 confirms a bullish engulfing week for WTI. A break above 96.40 is then needed to confirm upside potential towards the 100 region. In Brent, a break above 114.50 would confirm higher in range toward 116. Medium term outlook is bullish.

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