Gold at crossroads, awaiting direction

October 2011 was a month most commodity investors would like to forget. Heightened Euro zone concerns and perceived slowdown in Chinese demand saw prices take a solid beating.

Long liquidation and sell-off meant heavy price declines virtually across the commodity spectrum with even the seemingly safe haven assets losing value.

The lack of confidence in the macroeconomic picture did not spare even precious metals including silver and platinum. The ‘dash for cash' during early to mid-October and stronger dollar abetted the sentiment.

If last month was eminently forgettable, last week was not very different. Global commodity markets faced price swings linked to broader macro backdrop.

Once again, European sovereign debt crisis and associated uncertainties caused volatile price action. While energy markets picked up some momentum with heavy intraday volatility, base metals prices were mixed primarily because of concerns over what kind of landing China will have – hard or soft.

After initial uncertainty, concerns over the Euro zone debt issue eased towards the end of the week.

ECB reversed its hawkish monetary stance and lowered interest rates, while Greece signalled that a referendum will not be held for the rescue package. However, it is clear that the macro situation continues to be the key driver of global commodity price direction.

Us labour data

The US non-farm payrolls rose by 80,000 in October according to the Labour Department's latest data, with 104,000 new private sector jobs offset in part by 24,000 job losses in the public sector.

Unemployment has now fallen to a six-month low of 9 per cent.

Although growth prospects look relatively strong in the US, they are considerably weaker in Europe. The China factor is still worrying the market participants.

After several weeks of steady decline, incipient signs of falling iron ore prices being arrested are visible. Again, China is the key driver.

Volatility

Commodity markets are likely to continue to remain volatile for some more time until there is more clarity on growth related issues.

Any move towards pessimism will mean further price declines, while sustained flow of positive data would result in strong price appreciation of commodities that have tight and supportive fundamental.

Copper is one commodity that stands out as a potential candidate to be a clear winner. Financial market conditions favour outperformance of precious metals including the yellow metal.

Gold: The investors' favourite retained its gains above $1,700 an ounce, having gained 0.5 per cent week-on-week. In London on Friday the PM Fix was $1,749/oz, down from the previous day's 1,758/oz.

Silver performed poorly with a week-on-week loss of 4.2 per cent in value. Friday AM Fix was $33.95/oz, down from the previous day's $34.72/oz.

Investment flows into gold remain healthy as the metal retains its safe haven status amid continuing uncertainty facing other asset classes.

In October, ETP holdings were up by 25 tonnes.

Physical demand stays strong as seasonal factors hold sway. Investor interest will remain the key driver of price direction in the coming weeks.

On the other hand, ETP inflows of silver were weak and the metal is struggling to keep upward traction.

With weak fundamentals, the upside will be probed along with gold; but downside risk persists.

Base metals: The entire complex witnessed price falls last week caused by weaker macroeconomic sentiment. LME stocks of all base continued to drop.

Destocking in China has been cited as the popular reason for the weak sentiment.

However, if confidence returns to the market, metals like copper with tight fundamentals are sure to register robust price escalation. In case of tin and nickel, refined imports into China reached multi-year highs in September as destocking seems to have come to an end.

With falling LME inventory, market balances are tightening. A ramped up battery production in China will be highly supportive for lead.

Crude: The market continues to be impacted by highly variable macro sentiment.

Uncertainty of growth and therefore demand translates to a cap on prices.

On the downside, prices will be cushioned by healthy physical demand notwithstanding improvements in supply.

Although not prominent, geopolitical risks have not disappeared altogether. Expect Brent to trade in the $105-115 a barrel range.

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