Global commodity markets continue to ride on the horns of a dilemma. Even as concerns over slowing global economy and resultant attitude to risk continue to steer the markets at least in the short-term, there are incipient signals that the market participants believe the worst may be over. This belief is gaining ground following a combination of broad risk rally, improving US macro data and signal from the Asian major China that growth rather than inflation control would be the policymakers' priority from now on. Expectations of steady easing of the hitherto tight monetary policy are strong.

To be sure, it is not that the risks have weakened. The commodity markets certainly face potential risks if the European debt situation were to deteriorate. Additionally, for the market to gain confidence, sustained flow of positive macroeconomic data is necessary. It is also important to contrast the present with the 2008 situation. Then, commodity prices continued to rise despite weakening macro data and business confidence. However, in recent months, markets have adjusted to growth signals reasonably well.

If global economic and financial conditions improve as is widely expected and risk appetite returns to the market, commodities with sound fundamentals have the potential to gain rapidly in price performance. At what point of time this could happen is hard to tell though. The year 2012 is the year to watch and particularly the first quarter for directional change.

Gold: Financial market uncertainty and softer macroeconomic data have capped the upward movement in most precious metals. Gold, in particular, is caught in a pincer. The US dollar is relatively strong, while physical demand is soft at the current relatively high prices, especially in major markets such as India. Risk appetite is not robust enough to propel price higher.

Investment demand is, of course, good as evidenced by ETP holdings at record levels. Central bank buying still continues in bits and pieces. This week's EU summit may prove crucial. Overall, the macro picture remains largely gold positive with inflationary environment building. Silver remains vulnerable because of soft fundamentals (market surplus) and negative ETP flows this year.

Palladium is an exception in the precious metals complex because the metal is likely to swing from a state of surplus this year to deficit next year when the Russian State stocks are exhausted. Even this metal faces some vulnerability in the short-term in the face of fragile economic outlook.

According to technical analysts, the downtick in gold and silver presents better levels to buy. The market is unlikely to take a sharp dip; but gains through 1,765 and 33.70 for gold and silver respectively appear possible. In the event, an upside toward 1,800 and 35.70 may be confirmed. The medium-term outlook is bullish.

Base metals: A weakening outlook for Europe combined with concerns over China's consumption growth continues to haunt the base metals complex. While the European situation of weak demand seems to have already been built into the price, China has, so far, provided a bright spot. Signals from the Asian major have to be watched closely for indications of directional change in base metals prices.

Even if growth outlook worsens and sentiment deteriorates, many believe a 2008-type collapse may be unlikely because of leaner inventories following a phase of destocking and emergence of supply responses. That said, however, further downward price corrections cannot be ruled out.

According to technical analysts, a break below nearby support in the 7,600 area would confirm a move lower in copper towards 7,300 and then towards 7,100. On aluminium, there is reason to be bearish and one can look to the 1,975 area. Expect range-bound trading in the medium-term.

Crude: The tug-of-war between macroeconomic uncertainties on the one hand and rising geopolitical risks plus tightening fundamentals on the other has kept crude prices range-bound. The upcoming OPEC meeting will be held amid a complex economic, political and fundamental backdrop, an expert remarked adding oil market balances have softened since the previous meeting and the geopolitical context has deepened. Key participants are likely to defend the prices close to the current levels.

Technically, WTI looks bearish. A break below support at 96.50 area will confirm a test of area near 95.00. Further weakness through nearby support at 107 in Brent opens the 105 area. Medium-term outlook is neutral.

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