G Chandrashekhar

Fed tapering holds the key for commodity markets

G. Chandrashekhar Washington DC | Updated on March 12, 2018


The big news of this week will, of course, be the FOMC meeting scheduled for September 17-18 where, it is widely anticipated, a decision to taper the $85-billion monthly asset purchase will be taken.

It is a matter of conjecture at the moment what will be the extent or pace of such tapering – by $15 billion or $20 billion or $25 billion or whatever, although market consensus is veering around to a nominal $15 billion reduction as the first step.

What’s important is the signal from the Fed that it is now ready to reverse, albeit slowly, the ‘easy money’ policy of recent years. This signal is important for the global commodity market because of the price implication of reduced liquidity. Investors have been anxious and the commodity markets are already pricing in a Fed tapering.

Ironically, markets such as of base metals that usually take cognizance of positive macro data have not responded to any appreciable extent. This may be explained by muted demand conditions as also slowing Asian economies as well as evolving market balances. In most cases, including copper, the market is moving into a state of surplus. On the other hand, the recent rally in crude oil prices was triggered more by geopolitical developments especially concerning Syria. Last week was not particularly good for the metals complex. With the exception of palladium, prices of all precious metals were down in the London market. Silver was the worst performer with a decline of 5.8 per cent followed by gold 4.9 per cent and platinum 3.8 per cent. Palladium remained unchanged over the week. Base metals were down too week-on-week with lead losing 4.2 per cent in value, aluminium 1.8 per cent and copper 1.7 per cent on the LME. Oil WTI pared 2.2 per cent with gradually easing tension associated with Syria.

Gold: Bearish

The US Comex gold futures fell 2.4 per cent on Thursday to $1,330 an ounce, taking the weekly decline to over four per cent. In London on Friday gold PM Fix was $1,319, down from the previous day’s $1,328. Silver followed suit with Friday AM Fix of $21.72/oz versus the previous day’s $22.67. Platinum edged lower to $1,441 while palladium gained $10 to end the week at $700.

According to London-based consultancy GFMS, gold demand in the second half of 2013 will shrink to 2,237 tonnes from 2,533 tonnes of H2 2012, due to lower jewellery and bar purchases as well as reduced central bank buying. While gold prices have declined by 21 per cent year-to-date, interestingly, GFMS expects a move higher to $1,500 from now until early 2014 and then decline.

China’s gold purchases are forecast to exceed that of India by 100 tonnes. Of course, the contrarian forecast of a rise in gold price is not shared by most analysts.

Metals: Mixed bag

The entire complex has largely been driven so far this year by upside surprises on the supply side rather than demand growth. No wonder, the market has witnessed downward price pressure. With global growth signals picking up, demand conditions are likely to improve, but perhaps not to the extent of driving prices higher disregarding the fundamentals. In many cases, demand-supply balances are turning surplus. So, the upside price risk to the complex is rather limited.

However, the only metal that offers a genuinely independent bullish story is lead. With growth in the automobile industry robust, demand for the commodity driven is driven higher. According to International Lead and Zinc Study Group, the lead market is in deficit so far this year. Tin market is also expected to be in deficit in the next 12 months.

On LME, Friday cash copper flirted with the psychological $7,000 a tonne level again and closed a tad higher at $7,011. While aluminium ended at $1,745, lead dropped by 2.5 per cent to $2,045 and tin rose 2.2 per cent to end the week at $22,837.

Crude: Neutral

With geopolitical tensions somewhat reduced, the market is adjusting the risk premium. Fundamentals continue to be constructive. Any price breakout bias is currently to the upside.

Published on September 15, 2013

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