Gold suffers and silver collapses on broad-based commodity selloff

Oh! What a week it was. Commodity price collapse last week has captured media headlines as never before. The sudden broad-based price weakness — energy, precious and base metals as also agriculture — caught most participants by surprise simply because by no stretch of imagination have the fundamentals changed overnight. Indeed, it is clear that global economic growth still remains on track as evidenced by leading indicators.

The spate of selling was provoked by a combination of factors including concerns over the health of the global economy, choppy external markets and a stronger dollar in addition to threat of a Chinese slowdown. These sparked risk reduction. Silver was the worst hit because of steep increases in margin requirement and fell to its year-to-date average of $ 34 an ounce.

Oil prices fell by about 10 per cent with crude WTI declining below the psychological $100 a barrel.

Interestingly, the US employers added more jobs than anticipated by market consensus in April. Payrolls increased by 244,000, marking the largest monthly gain since May 2010, following an upwardly revised rise of 221,000 in March and 235,000 in February, according to the US Labour Department.

“These data were reassuring for the markets that had become worried that economic recovery was stalling in the world's largest economy,” commented an expert.

Even as the depth and the breadth of the price declines surprised many, attention is now focussed on the ‘role of funds' in triggering such a widespread price collapse. The current debate is on what caused the price action - funds or fundamentals?

How the next few days pan out remains to be seen. Continued volatility can be expected. In some cases such as gold and silver as well as oil and copper, further price declines are not ruled. But looking at the market fundamentals, in select cases, price dips would provide a good buying opportunity. Copper is of course one such commodity.

However, caution is necessary. It is advisable to allow the market to settle down and seek direction. Fundamentals are sure to reassert themselves in case of growth commodities.

Gold: Bullion prices came under intense pressure as the dollar strengthened.

Concerns over a slowdown were felt. There was massive long liquidation and profit booking as punters felt the price escalation had been overdone in the last leg of price increase. While gold declined below

$1,500/oz, silver was in the eye of the storm. Importantly, successive increases in margin requirements weighed upon silver as a result of which prices collapsed by over 25 per cent over the week. ETP holding fell by over 1,100 tonnes.

On Friday, in London, gold PM Fix was at $1,487/oz (down 1.6 per cent) from the previous day's

$1,511/oz. Silver AM Fix was at $34.20/oz on Friday, down a massive 9.6 per cent from the previous day's $ 37.84/oz.

We have been saying in these columns in recent weeks that silver lacked fundamental support and that price correction in gold would send silver reeling down. For 2011, the global silver market is in surplus, estimated at 5,000 tonnes. With this kind of surplus, only a speculative frenzy can propel prices to unconscionable levels as witnessed in the last several weeks.

The market is likely to stay volatile before it stabilises. Interestingly, with such a sharp correction in gold and silver, there is strong possibility of re-emergence of physical demand. However, there is widespread belief that there is some more downside left to bullion prices; but Asian demand is largely expected to cushion the downside.

According to technical analysts, as for silver, a close below 34 would confirm the next leg lower towards 31. Below 1,455, gold would seek support near 1,440 initially. While there is short-term weakness, the medium term looks bullish for bullion.

Base metals: Over the week, almost all metals in the complex showed price declines. The main LME metals lost from 5 per cent (zinc) to 8 per cent (nickel). On Friday, however, tin stood out on the upside with a rise of 2.6 per cent.

The market has been buffeted by macro headwinds including concerns over slowdown Chinese demand amid continual monetary tightening measures. In some cases such as copper, the market fundamentals do not appear to justify the scale of price declines. The recent weakness may actually provide a good buying opportunity.

The boost for base metals will have to come from stronger and sustained signals of global growth and reliable data from China. There are supply side concerns too such as energy rationing in China this summer which can boost the price prospects not only of aluminium but also lead and zinc, nickel and tin. Japanese demand for reconstruction is another factor to reckon with.

Crude: Despite last week's price decline of over 10 per cent with WTI dipping to about $99 a barrel, the fundamental picture of the oil market is still constructive. A combination of healthy growth in demand, continued geopolitical instabilities and falling inventory levels is strongly supportive.

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