A broad-based decline in markets last week in the wake of escalating sovereign debt concerns in Europe and a general unease over macroeconomic conditions put global commodity markets under pressure.
Weaker-than-expected data weighed on the base metals complex, while growth concerns fanned by untamed inflation affected the crude market. Even tightening fundamentals in some case have had little impact on steadily declining prices.
The US consumer confidence fell by more than forecast as a result of pressure from higher prices and worries over the outlook for jobs and the housing market. Worse, the OECD composite leading indicators for April showed a mild loss of growth momentum in most major economies. The loss of growth momentum in manufacturing activity is borne out by the fact that the 6-month annualised change in the OECD + 6 major developing countries fell to 2.3 per cent from 4 per cent at the start of the year. This will have implications for growth-commodities.
There is also move, especially in UK, to hem-in commercial banks in the commodity investment space by separating lending and investment activities. How the issue pans out remains to be seen. In the event, flow of investment funds into the commodity derivatives market may be impacted.
So, global commodity markets are currently caught in such an awkward position that bullish and bearish factors are tearing them apart. Central banks of developing countries continue to tighten bank credit to fight inflation. These uncertainties surely help one commodity that is gold which continues to enjoy investor interest. In the short-term for sure, supportive factors for the yellow metal are strong.
The coming weeks are expected to be crucial as markets look for clear direction and take cue from policy decisions. Taking a far forward position may not be advisable as the market is in a state of flux and it may take some time for clarity to return.
Gold: Despite seasonal weakness, gold prices continue to be supported by macro environment. Inflation fears, heightened European sovereign debt crisis and weakening equity markets drive investors towards the yellow metal. A stronger dollar vis-à-vis euro was of no avail.
In London on Friday, gold PM Fix was at $1,538 an ounce, up 0.9 per cent from the previous day. Silver softened by 0.5 per cent on Friday to $ 35.39/oz.
Investor interest continues to be the key market driver. Despite favourable environment, for any reason if investor interest wanes, gold prices could be subject to temporary correction. However, at every fall, physical demand is likely to emerge to support the market.
After the collapse last month, silver prices have struggled to gain upward traction, but somewhat unsuccessfully. The underlying demand and supply fundamentals are weak. The global silver market is in surplus.
According to technical analysts, gold is poised to recover towards 1544 and a close above that would target the 1577 high. In case of silver, a decisive break above 36.60 would signal further recovery towards 37.90. The medium term outlook for both precious metals is bullish.
Base metals: Prices in the complex continue to be weaker as Greek debt contagion continues to weigh heavily on the sentiment. Over the week, investor risk aversion was witnessed. While copper stayed flat, aluminium dropped by 4 per cent and nickel fell by 5.2 per cent, despite another 3 per cent fall in LME nickel stocks in the week. However, on Friday, the metals held up reasonably well notwithstanding the macroeconomic concerns and sell-off in oil. Copper closed at $ 9,087 a tonne, up 0.3 per cent.
Global growth concerns are clearly dominating the sentiment and price action. Loss of growth momentum in major OECD countries is causing concern. Some experts foresee a danger in the base metals complex overshooting to the downside.
Clearly, in some case the fundamentals offer good support. Copper is a fine example. Aluminium too has witnessed rising prices following rising cost of production. Given the consumer friendly fundamentals, nickel (supply improving) and zinc (in surplus) are unlikely to see any major price risk to the upside.
According to technical analysts, the 8860/9280 range trade for copper continues. A move through 9280 would open 9420 above which would signal return of bullish tendency. As for aluminium, above 2510, the target near 2700 looks plausible.
Crude: Despite strong market fundamentals, macroeconomic concerns have come to the fore. Prices are under pressure. The spread between WTI and Brent has been volatile. Saudi Arabia has unilaterally decided to ramp up production to 10 million barrels a day. Demand side continues to be strong with Chinese data surpassing expectations.
According to technical analysts, a clear break below 112.50 signals further weakness in range for Brent towards 110 and then 108, while WTI extends losses towards next target near 90. The medium term outlook is bullish.