Gold crashes on profit taking, crude oil looks bullish

The global commodity markets continue to be buffeted by positive and no-so-positive signals emanating from the steady flow of macro data, geopolitical developments and currency gyrations. Last week was somewhat mixed for the major commodity markets even as growth signals continued to point to a positive outlook and geopolitical tensions remained unabated.

Crude oil has been on an upward trajectory for several days now with the build up of high levels of net long positions in the market. Base metals remained broadly supported by positive macroeconomic data and growth outlook that showed the world on a recovery phase, but Chinese demand is proving to be a soft spot. No wonder, base metals had a mixed week with the entire complex down barring copper and zinc.

Precious metals came under pressure from Wednesday with gold and silver leading the losses as the Fed chairman did not signal an adjustment to the current monetary policy stance and the dollar firmed. In London, gold was down 4 per cent over the week, while silver was down 1 per cent. At $1,707 and $1,704 an ounce each, gold and platinum prices respectively are nearly congruent.

Going forward, the upside price risk to major commodities such as crude oil and gold is likely to gather strength. Flow of investment which nearly dried up in the last quarter of 2011 is slowly winding its way back into the market. Investors are again seeking exposure to commodities with a strong fundamental case, but are testing the ground to see whether the recovery is sustainable, commented an expert. Commodities with promise of price performance include crude oil, copper and gold.

Gold: Prices came under pressure last week as the market witnessed a huge sell-off. While the dollar strengthened, the Fed chairman's position that it was unlikely to change it monetary stance or allow further asset purchase resulted in profit taking.

On Friday, in London, gold PM Fix was $1,707/oz, down from the previous day's $1,714/oz. Silver bucked the trend to Friday AM Fix at $35.21/oz as compared with the previous day's $34.56/oz.

Without doubt, in the near-term, gold faces some hurdles to price rise.

Together with risk reduction, the physical market response has been mixed, making the metal vulnerable to profit-taking in the near-term. The forex market outlook is bearish for the yellow metal.

On the other hand, the macro backdrop is gold positive given the build up of inflationary conditions, negative interest rate environment and unresolved sovereign debt issues. The metal tends to perform well when crude oil prices rise. Yet, given the strong dollar and large net length in the market, any significant near-term gains look inhibited. Silver needs strong investor demand support, but in the near-term it will generally take cue from gold. According to technical analysts, there is reason to be bullish on gold in the medium-term, but caution about weekly reversal signal is warranted.

A move towards 1,800 area will come about but not without a bumpy ride.

Base metals: The complex remains broadly supported by flow of positive macroeconomic data and signs of improvement in industrial production. However, demand conditions in China have turned softer in the spot market. Early signs of stock rebuilding and slow demand recovery are visible; but moderation in base metals imports in the next couple of months cannot be ruled out.

For metals prices to hold on to the current levels or rally further, solid evidence of sustained growth is necessary. The metals with potential for price performance are copper and tin both of which face market deficit this year.

According to technical analysts, aluminium has not been able to sustain above 2,350 and therefore a neutral stand may be warranted. A decisive break above would target 2,380 next. Gains in copper towards 8,765 look unlikely; while a move lower toward 8,300 is plausible. Medium-term outlook is range bound trading.

Crude: Supply cuts amid geopolitical tensions combined with build up of long positions have sent prices soaring. While supply risks continue, demand conditions are robust. According to experts, Brent prices are likely to rule between $120 and $130 a barrel over the next few months.

Technically speaking, crude looks bullish and one can look to buy on dips against 119 in Brent and 114 in WTI. The initial upside target for Brent is at 131. For WTI, one can look to break above 110 to confirm a move toward the 115 highs. Medium-term outlook is bullish.

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