Gold may see profit taking; silver, crude oil look bullish

The European sovereign debt issue once again came to the fore last week with Greece – the centre of attention – while geopolitical tensions in West Asia continued unabated. Global commodity markets reacted to the developments.

The immediate impact was seen on the crude oil market which broke out of its recent range trade and spurted given its constructive fundamentals. The status relating to Iran's supply of crude oil to Europe is far from clear.

The OECD composite leading indicators, designed to anticipate turning points in economic activity relative to trend, point to a positive change in momentum for the OECD as a whole, driven primarily by the US and Japan; but similar signs are beginning to emerge in a number of other developed economies.

The lead indicators for Russia and India also show signs of an upward change in growth momentum while Chinese data point to a slowdown. This is being interpreted as an indication of stabilization in the global industrial sector early in 2012.

However, week-on-week, on LME, all base metals prices were down varying between 3.4 and 6.8 per cent. Silver was down over the week by 0.2 per cent while gold was up 0.7 per cent. Crude too was up sharply.

Weather continued to create uncertainties with dry conditions in southern Brazil creating risks – as yet not quantified – for the soyabean crop. It is also believed that La Nina is weakening and its eventual impact on crop output would be modest.

Going forward, in the midst of growing confidence over global growth prospects, for short-term global commodity market price outlook it will be necessary to track developments in Europe, particularly in Greece. Tensions in West Asia also need close attention.

Gold: On Friday, all precious metals were higher at the London PM Fix. Gold was at $1,723 an ounce, higher from the previous day's $1,713/oz. Silver toed the line with Friday AM Fix at $33.48/oz versus $33.18/oz the previous day.

Currently, gold is caught in a dilemma. With improving signs of global growth and the dollar staying relatively steady, investor interest, although healthy, is not rising sufficiently. The physical market support is modest. One can expect profit taking. On the other hand, geopolitical tensions do not show signs of abating and rise in crude prices may fuel inflationary tendencies. The precious metal is searching for a catalyst to take prices to the next level.

As for silver, fundamentally the market is in surplus. Yet, investors have favoured the metal that has led to the recent rally. However, investment demand will need to grow continually to address the surplus.

According to technical analysts, there is reason to be bullish on silver. They advise buy at dips towards the 31.55 area. From there a move higher can be expected towards 35.70. As for gold, one may buy on dips against 1640/70, targeting the 1800 area. The medium term outlook is neutral.

Base metals: Although prices in the entire complex turned softer last week following concerns over slowdown in China, broad indications of improvement in global economic outlook are supportive of base metals. For prices to rally, sustained flow of positive macroeconomic data is absolutely necessary. As is well known, for the global metals market, China is a critical factor where temporary surplus conditions may be at play.

China's imports and consumption until two months ago were robust which have begun to slow and may continue to be so in the weeks ahead. Thus the stage may be set for some price moderation.

However, once the surplus begins to diminish, the Asian major is sure to return to the market in a big way, sometime in the second quarter.

According to technical analysts, closing below 8280 in copper would confirm view for a near-term dip toward the 8000 area. In aluminium, a break below 2148 would signal further weakness toward target at 2120 and then 2080. The medium term outlook suggests range.

Crude: According to reports, OECD inventories are far tighter despite a warm winter and three-year high OPEC output, providing further upside to prices. A large demand surge from Asia and recent cold spell in Europe are seen pushing the market higher.

Robust demand combined with supply shortfall means inevitable inventory drawdown with implication for prices.

The technical picture suggests a bullish outlook. For Brent the target area is 121 and for WTI first 104 and then 105. Buy on dips toward 116. The medium term outlook is bullish.

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