Global commodity prices buoyed last week driven by a combination of rising geopolitical concerns and steadily improving macroeconomic data transforming the sentiment across commodity markets, be it energy or metals and propelling prices higher. Crude oil received a renewed price boost following some tough talk by Iran. For the week ended February 24, not only was oil up, but also all metals closed the week on a positive note. While gold moved higher 3.2 per cent week-on-week, silver was the star performer with a spurt of 6.2 per cent. On the LME, the base metals complex buoyed with price increase of between 2.8 per cent and 8.2 per cent with aluminium the star performer. Lead prices too were strong. Copper was relatively muted with a rise of 4 per cent on week ($8,553 a tonne on Friday cash LME) while aluminium was $2,287/t.

Global steel output declined in January putting an end to a 28-month year-on-year growth run. According to Worldsteel data, in January, world steel output was 117.9 million tonnes equivalent to 1,388 million tonnes per annum. Data from the world's largest producer China and other countries went into the negative territory. Going forward, it is clear that geopolitical developments and macroeconomic performance will dictate commodity price direction. Fortunately, the growth momentum in several major economies such as the US and Japan is turning positive. An expert report pointed out that with European economies experiencing the slowest growth across the world (with many countries in recession), record-high oil prices do create a private oil shock of sorts.

Commodity markets need to be watched closely because they are now torn between constructive fundamentals on the one side and uncertainties over sustained growth, European debt crisis and geopolitical instabilities on the other. In particular, implementation of the Greece deal remains a risk.

Gold: In London on Friday, gold PM Fix was $1,778 an ounce, virtually unchanged from the previous day's $1,777/oz. Silver out-performed gold last week. On Friday the AM Fix was $35.57/oz up from the previous day's $34.55/oz. Prices gained some traction last week, but gold is clearly looking for a price direction. Both positive and negative factors are currently at work. There is physical demand support but it is slowing. Investor interest is relatively soft. A stronger dollar and profit taking saw speculative length on the bourses shrink. In the short-term, one can expect gold to trade in the $1,700-1,750 an ounce range, with a strong downward bias for prices which can potentially go towards $1,650/oz. While the forex market (US dollar) looks bearish, improving equity market will force punters to exit gold. In the medium-term, however, the external environment is favourable for the yellow metal. Real interest rates are near-zero, inflationary expectations are building and geopolitical tensions have been mounting. Additionally, interest rates in the US are most unlikely to rise until 2014. ECB sales are absolutely lukewarm and central bank buying is supportive. Gold needs a catalyst to take it to the next level. From a fundamental perspective, silver's recent rally is unsustainable; but investment demand is the key. Gold's inability to break out of the mid-1700 trap may cap silver's upside. Questions are now being raised in India about the unprecedented $ 40 billion (Rs Two lakh crores) said to have been spent on import of gold in 2011. The artificiality of the value is stark. Questions are being asked about gold import funding and disposal of the metal. Investigations may bring out the truth and can potentially reduce import volumes in 2012. According to technical analysts, there is reason to be bullish on gold. It would be advisable to buy on dips against 1700 in expectation of a rise to 1800. In case of silver, a decisive break above 35.70 can take it towards 37.30. The medium-term outlook is neutral.

Base metals: The complex is supported by positive macroeconomic data and stabilisation of industrial output. China continues to be the focal point for price direction. There is expectation of stock building and demand recovery. Read together with recent positive leading indicators relating to the US, Japan, Russia etc, the emerging picture is one of cautious optimism. Last week, all base metals prices were up. Cash copper closed $8,553/tonne on LME and aluminium at $2,287. Currently, short-covering is said to provide some upside strength, but for the rally to be sustained new long positions will have to be established. Copper and tin are two metals in deficit this year, and so enjoy the largest upside price potential. Technically, there is near-term upside scope for copper. Buying against trendline support near 8250 may prove beneficial for a move toward 8765. For aluminium, further upside gains are limited. In the medium-term, range trading is seen.

Crude: Heightening geopolitical tensions and constructive market balances push prices higher, scaling new highs in euro terms. Demand remains supportive. The technical picture suggests that a decisive break above 123.80 in Brent would suggest a move toward 126.65 and then 127. For WTI, an initial move toward 110 area and then toward last year's high near 115 looks possible. Medium term outlook is bullish.

gchandra@thehindu.co.in

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