Amid squaring up of positions and thin trading volumes that usually occur towards year-end, many commodities in the global marketplace headed for their first annual decline since the downturn of 2008. The year 2011 ended with continuing uncertainty over global economic growth prospects with almost every major economy slowing down in recent months. Investors have been wary. There is clear evidence of risk aversion. Hedge funds have liquidated their positions considerably.

The dollar's strident performance in relation to the euro has accentuated the downward price pressure on several commodities, mainly energy and industrial metals that are growth-driven. The US provides the only silver lining in an otherwise gloomy global picture. Interestingly, although China has dominated the commodity demand headlines and is being closely watched for its market-moving role, the US has in recent times been displaying steady, above-trend growth. In the last quarter of 2011, the US was perhaps the only major economy where commodity demand growth logged nearly double-digit percentages on a year-on-year basis.

From the Chinese side, November trade data continued to point to robust commodity demand. During the month, imports of copper, coal, crude and soyabean all hit their highest levels during the year. Iron ore imports were robust too. Yet, fears over the health of the Chinese economy continue to grow. Many are unsure if the pace of demand will continue.

Some analysts point out that as China's destocking cycle has come to an end and inventories are slim, restocking demand must emerge. The credit tightening cycle too has come to an end making more funds available and the Yuan has gained strength, making imports cheaper. These could trigger import demand.

So, going into the New Year, developments in China and the US together can potentially impact commodity markets. At the moment, there is little doubt about positive signals emanating from the US. For the economy to perk up further, infrastructure and construction spending must pick up markedly. In sum, if the US maintains its decent momentum and China does not falter, there is hope for many commodities in terms of price performance.

As commodity prices have until now been dragged down by sovereign debt concerns despite reasonable fundamentals, even a modest recovery in business confidence could result in a spurt in commodity prices. Therefore, there is reason to stay positive about commodity price performance in Q1 of 2012. However, on must hasten to add, the sentiment is likely to be heavily influenced by macro factor rather than individual market dynamics.

Investor interest is key factor. So far, investor positioning has been rather cautious. Cash has remained king. Market participants including hedge funds have been liquidating positions rapidly.

Gold obviously is a good example of risk aversion affecting commodities. Prices have come under intense pressure trading around $1,560 an ounce, the lowest for six months. The precious metal has been battling dollar strength, risk reduction and need for liquidity. Unfortunately, falling prices in dollar terms have failed generate physical demand to an appreciable extent.

In India, the world's largest importer, gold prices have stayed near record levels simply because of the rapid depreciation of the rupee vis-à-vis the dollar. So, the benefit of falling gold prices in dollar terms has not benefited Indian consumers because the rupee's weakness has neutralised gains, if any.

While in the short-term, gold is likely to continue to remain under pressure, in the medium-term, conditions are positive for a rebound. Uncertainties, negative real interest rates and rising inflationary pressures are highly supportive. Continued central bank buying is another factor. So long as equity market performance remains muted, gold has the opportunistic capacity to provide a safe investment avenue.

Base metals faced a weak second half of 2011. Demand conditions have been far from robust. European economic woes took their toll. No wonder, large amounts of funds were withdrawn from investments. For the sentiment to change, demand conditions must improve.

To sum up, we must reiterate what was said in the past. For the business confidence to improve, sustained flow of positive macro data is necessary. In the event, fundamentals will assert themselves. Commodities that are growth-led and whose fundamentals are tight have the biggest opportunity for a price spurt. Crude and copper are two outstanding ones.

gchandra@thehindu.co.in

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