Commodities rally; now, all eyes on Fed meet in December

As widely expected, the big news last week was about FOMC meeting and anticipated start to tapering of asset purchase; but as it turned out, it was a big surprise with the Fed’s unexpected decision to stick to its $85 billion a month stimulus programme.

It proved to be a positive boost to commodity markets with price gains virtually across the board. There was huge short-covering rally. Precious metals were the biggest beneficiaries. Base metals followed suit, while crude made modest gains. The US dollar weakened.

Experts point out that relative to other financial markets, commodities are more volatile. Yet, the reaction was seen more as knee-jerk. As it happened, the market recognised that it had overshot to the upside with irrational exuberance and began to correct down a day later.

The markets are now beginning to recognise the enormity of an expanding Fed balance sheet (a net $1 trillion this year) and that QE cannot continue forever. A steady decline in the US jobless rate is surely a trigger for the Fed to revisit the tapering issue which can potentially happen either next month or in December. So, the price impact of continuing with the QE will be short-lived.

On Friday, metals gave back much of the post-Fed gains. In London on Friday, gold lost 1.2 per cent while silver was down 1.1 per cent and platinum 1.5 per cent. Similarly, nickel shed 2.6 per cent, lead was down 2.1 per cent, while zinc and aluminium were down 1.8 per cent and 1.7 per cent respectively in value.

Notwithstanding the Friday correction, week on week, precious metals gold and silver gained. Silver was the outperformer with price gain of 4.7 per cent followed by gold with 2.3 per cent. Palladium gained 3.7 per cent. Among base metals, copper benefited by rising 3.5 per cent and nickel 1.1 per cent in price.

Going forward, the euphoria is expected to wane. The price rally is likely to be temporary. Fundamentals will begin to assert themselves. Most economists are now convinced that the Fed’s December meeting will be crucial and expect the Fed to announce reduction in asset purchase by $15 billion.

This sword hanging over the head is likely to cap the upside for most commodities.

Gold: The metal enjoyed an unexpected price upswing. In London on Friday, gold AM Fix was $1,349 an ounce, down from the previous day’s $1,366. Silver AM Fix was $22.74 versus previous day’s $23. Platinum too pulled back to $1,447 ($1,469) but palladium remained unchanged at $726.

The weakening of the US dollar post-Fed ($1.35 to a euro) has provided much needed boost to the yellow metal which risked a sharp downward correction otherwise. But currency experts are confident that the greenback will rebound soon with the US macro data continuing to improve.

Ahead of the Fed meeting, tactical positioning in Comex gold had been light and net fund length had fallen. With change in sentiment, albeit in the short-term, fresh longs may have been established as evidenced by the price move higher.

Physical demand across Asia continues to remain sensitive to price. Any increase in dollar price combined with weak local currency (such as in India) will further compress physical demand. In India, local prices have remained above Rs 30,000 for 10 gm. The saving grace is of course beginning of the seasonal demand. Import regulations continue to be tight. Last week, import duty on gold jewellery was raised to 15 per cent from 10 per cent.

Technical picture suggests the momentum for gold is bullish. Resistance is seen at $1,315 and $1,375 while support may be available at $1,310 and $1,290. Buying interest ahead of the $1,290 area is expected to underpin gold. Above $1,375 would signal extension toward $1,400.

Base metals: The complex benefited from the US Fed announcement. However, this is likely to be short-lived as fundamentals are not supportive. Most base metals are getting into a situation of surplus.

Additionally, global growth concerns and slowing Chinese demand continue to check any upward price movement. Copper is likely to get into surplus in Q4. Experts favour selling copper into the current price strength.

On Friday, LME cash copper closed at $7,257 as tonne following a post-FOMC short-covering fuelled rally. Aluminium ended the week at $1,755/t. Technically, momentum in copper appears bullish with resistance at $7,535 and $7,370, while support is seen at $7,200 and $7,020. Gains towards $7,400 area appear to fade, while a move below $7,000 would confirm lower toward $6,700 area.

Crude: Oil markets so far this year have been dictated by supply side developments with major upside from non-OPEC and disappointment from OPEC. Geopolitics will continue to be a matter of concern. Brent is widely expected to move down $5-7 a barrel as tensions ease.

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