Last week, the world commodity markets witnessed big moves as the seemingly never ending Euro zone woes again came to the fore. The region was the focus of global commodity market attention last Friday as reports that S&P would cut France's AAA rating percolated while debt talks between the Greek government and Greece's creditor banks broke-off.

No wonder, while the base metals market traded broadly lower that day with aluminium, lead and zinc heading down, all precious metals suffered. Interestingly, however, over the week all base metals showed price gains ranging between 3.3 and 6.3 per cent, while platinum was up 4.9 per cent and gold 1.2 per cent.

A day earlier, on Thursday, base metals and precious metals had rallied. The market sentiment was buoyed by reports of slowing inflation in China and a stronger euro which gained following two successful bond auctions by Italy and Spain, and the ECB keeping policy rates at 1 per cent. Copper was the strongest performer with prices briefly trading above $ 8,000 a tonne, for the first time since November 2011 and closing 2.9 per cent up for the day.

The OECD composite leading indicators based on November 2011 data continue to signal slowdown in global economic activity for most major economies. While the overall mood is far from upbeat, the US, Japan and Russia provide the silver lining with positive signs of growth momentum.

According to experts, the leading indicators show clearer signs of an inflection point which means that in the absence of any major shocks, industrial production in the OECD region may bottom out in the coming three months or so. However, the picture for China is more ambiguous.

Major agricultural commodity prices lead by corn (maize) posted sharp declines last week following a bearish USDA report. However, the market is far from settled as many imponderables including South American weather will dictate the price direction going forward. Both corn and soyabean markets are particularly sensitive. Global economy in general and commodity markets in particular continue to remain vulnerable torn as they are between geopolitics, growth concerns and sovereign debt crisis. We need definite evidence of sustained growth. Today, weak sentiment overrides fundamentals in many cases. So, caution is the watchword.

Gold: On Friday, all precious metals suffered. In London, the Friday PM Fix for gold was at $ 1,636 an ounce, down from the previous day's $ 1,661/oz. For silver, the AM Fix was down to $ 29.64/oz from Thursday $ 30.58/oz.

However, gold prices have managed to settle well above $1,600/oz as physical demand is currently seen providing a cushion for prices even as investment appetite has waned. China's gold imports in November have reportedly hit a high. Gold ETP holdings have ticked higher.

The precious metal will continue to battle dollar strength. The macro environment continues to be positive, while investor interest is somewhat tepid. A considerably weaker rupee has made gold expensive in India, but the yuan's strength means cheaper import prices for China. On the other hand, interest in silver remains soft. The metal is trying to gain traction without investment demand; but the market is in surplus. Investor interest and industrial demand would support prices.

According to technical analysis, selling interest in gold near 1662 should keep near-term focus lower towards the 1605 area. Silver shows signs of a top under 30.80. The metal can move back towards 28.60 area before looking for a base. The medium-term outlook for bullion is neutral.

Base metals: The complex has had a reasonably healthy start to the New Year with the sentiment buoyed by perceptions of improving macroeconomic environment and supportive fundamental data. For instance, on Friday LME 3 month copper was $ 8,000/t, a psychological level. However, one must hasten to add, the market is not without risks both short-term and medium-term.

We need sustained flow of positive macroeconomic data. China's appetite for consumption and trade data are key determinants of price direction. While copper may be driven by demand pulls, aluminium prices are likely to be supported by supply cuts and rising production costs. One can imagine what would happen to base metals prices if the present weak sentiment regarding growth were to improve.

According to technical analysis, a weak close for copper signals a top under 8,280 range highs and risks downside towards target area near 7,740. Selling may emerge in aluminium against the 2,200 area for a move towards 2,025 area. In the medium-term, the market may be range-bound.

Crude: Geopolitical tensions are once again rearing their head; but macroeconomic concerns have not weakened either. Would traditional buyers of Iranian oil look for alternative supplies? Who will fill the gap? These nagging questions surround the market. According to experts, the EU could potentially delay its oil embargo on Iran by six months, allowing for some time to build inventories before the sanctions bite.

Technically, the picture for crude is that a break below 98.20 area in WTI would signal near-term downside toward 95. A move below 109 in Brent risks a move toward 108. The medium term outlook is neutral.

> gchandra@thehindu.co.in

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