Gold hits record highs, but corrects on margin hike

Global commodity markets continued to face wild price moves last week with unsettled macroeconomic conditions, financial market gyrations and risk aversion the defining theme.

Energy and metals markets continued to witness bouts of intraday price fluctuations. As for crude, prices fell sharply early in the week with valued pared down by $10-20 a barrel.

While WTI settled below $80 for the first time this year, Brent managed to hold above $100.

Metals markets were no exception with continued price volatility unsettling market participants. Base metals finished mostly down, with copper losing 1.9 per cent.

However, precious metals shone brightly. Platinum outperformed with a rise of 5.3 per cent week-on-week following renewed investor interest and gold was up 4.7 per cent.

Silver, however, lost as much as 2.4 per cent over the week as investor interest waned.

Specialists point out the ongoing disconnects in price behaviour between exchange-traded commodities and bulk commodities not widely traded on the bourses (iron ore and hard coking coal, for example).

The former are arguably more susceptible to macroeconomic developments, gyrations of currency and financial markets, and importantly flow of speculative capital.

In case of the latter, prices depend on physical market activity, and their movement is based largely on market fundamentals.

Very clearly, the financial market woes have had an adverse impact on commodity prices with outflow of funds resulting from risk aversion. At the same time, falling commodity prices have encouraged physical demand and supported the market from further collapse.

Going forward, the next few weeks are sure to be crucial as the global market is groping for direction.

A change in the US easy money policy looks near impossible in the next several quarters. Whether it would lead to build up of inflationary environment remains to be seen.

Steady flow of positive macroeconomic data - growth and employment - over a period of time can help regain market confidence. Until then, safe haven assets will be in the limelight.

Gold: Once again a positive week for gold with prices touching newer highs propelling through the $1,800-an-ounce mark.

The metal hit record highs across several currencies including the rupee.

Safe haven buying boosted prices. Pessimism about global economic prospects and heightened macroeconomic risks drove investor interest towards the yellow metal. ETP holding have hit record highs and speculative positions on the Comex are at record levels.

Gold rose by a robust 4.7 per cent over the week. Following a sell-off and profit-booking and in the wake of hike in margin requirements, prices corrected down.

On Friday in London, the PM Fix was at $1,736/oz, down 1.4 per cent from the previous day's $1,760/oz.

The external environment for gold continues to remain highly supportive; and further boost to prices cannot be ruled out, despite seasonal weakness in physical demand.

Silver was, of course, an exception as prices continued to fall on weak fundamentals. The week-on-week decline was 2.4 per cent.

In London, Friday AM Fix was at $38.39/oz, down 2.3 per cent from the previous day's $39.18/oz.

According to technical analysts, the short-term and medium-term indicators are bullish for gold and it would be confirmed if support continues at around 1680.

Silver is likely to be range-bound between 40 and 37. The medium-term outlook is bullish.

Base metals: A mixed week for the base metals complex. Rapid deterioration in the macroeconomic environment which translates to pessimism over future growth prospects (especially in the developed economies) led to sharp falls in select base metals prices over the week.

Nickel was the worst sufferer with loss of 5 per cent in value ($ 21,353/t), while copper ($ 8,845/t) and zinc ($ 2,177/t) prices too were pared down.

While the industrial world sentiment is decidedly sombre, it is important to track the dynamics of growth markets such as China.

The Asian major accounts for as much as 40 per cent of the world's base metals consumption.

Whether China will have a hard landing or soft landing is still being debated. There is growing belief that sooner rather than later, China will have to begin to restock its depleting inventory.

The recent price falls are widely seen as buying opportunity especially by the Chinese.

In the event, market fundamentals, rather than sentiment, will come to the fore and dictate direction of base metals prices.

According to technical analysts, copper is still unable to escape from its weekly cloud. Larger picture remains neutral while squeezed between cloud support and trendline resistance at 8100 and 9900 respectively.

Aluminium is trying to bottom against 2350. Medium-term outlook is neutral.

Crude: With sentiment rapidly degenerating because of the twin effects of macroeconomic concerns and unresolved sovereign debt crisis, there has been a severe downward lurch in risk appetite.

This sudden risk aversion or risk destruction has meant a value loss of $10-15 a barrel in recent days.

Will the current downward movement turn into a repeat of 2008 is the big question currently engaging almost everyone.

Further price direction will clearly depend on flow of macroeconomic data and whether such data improve or worsen the sentiment.

Chartists suggest that in the absence of a strong rebound, it would be advisable to stay neutral or bearish.

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