It was a truly metallic time for the entire metals complex covering base, precious and industrial metals last week with an exceptional across-the-board price rally caused by the twin effects of China’s pro-growth policy stance and the US Federal Reserve action of easing liquidity further. Sharp weakening of the dollar accelerated the price movement of global commodities.

The US Fed’s new round of aggressive stimulus (popularly referred to as QE3) included an open-ended commitment to buy $ 40 billion of mortgage-backed securities each month until the country’s job prospects made a sustained recovery. Jobless claims in the US are still at a worrisome 8.1 per cent.

All base metals gained over the week with aluminium outperforming others with a rally of 9.5 per cent. Not to be left behind, tin gained 8.8 per cent, lead 8.6 per cent and copper 5.1 per cent all on the LME. While price gains in precious metals were widely anticipated, silver surprised by vaulting a whopping 7.7 per cent over the week to have a Friday AM Fix of $ 34.71 an ounce in London.

In comparison, gold’s price gains were less dazzling at 2.7 per cent for a Friday PM Fix of $ 1776/oz. On the other hand, platinum gained 6.5 per cent and palladium an incredible 8.5 per cent.

Is the commodity price rally an indicator of return of demand based on global growth? Far from it, this round of price performance is driven significantly by policy-induced increase in liquidity rather than any positive change in the underlying fundamentals. Risky assets are rallying and there is speculative positioning.

The macro-economic conditions do not really support such a rally; if anything there are downside risks. The latest OECD composite leading indicators point to a continued loss of momentum in most major economies; and worse, the loss of momentum is likely to persist in the coming quarters.

Without fundamentals support, the ongoing price rallies are likely to fade sooner rather than later. The current environment is still risk-on, risk-off with investors unsure of the shape of things to come. Logically, base metals could see some correction coming, but precious metals could gain.

But even in the latter case, gold has really struggled the whole of this year to gain traction despite the supportive backdrop of global economic uncertainty, European sovereign debt crisis, geo-political instabilities and so on. A lot of gold bulls who were forced to stay in the sidelines are now positioning themselves attempting once again to lend a positive sentiment to the yellow metal; but don’t be unprepared for surprises.

Gold: In London on Friday, the yellow metal rallied to a PM Fix of $1,776/oz, up from the previous day’s $1,733/oz. Although the announcement of QE3 was widely anticipated, the strength of gold’s price rally was less impressive when the decision finally came. What stole the show was silver with Friday AM Fix of $34.71/oz versus the previous day’s 33.00/oz. Of importance is the jump in platinum prices which touched $1,697/oz reducing the differential with gold.

Physical demand for the yellow metal continues to be lacklustre with Indian consumption slowing considerably following consumer resistance caused by record high prices.

The situation is unlikely to change anytime soon because of drought conditions and decline in rural incomes. Indeed, reports suggest, scrap sales are expanding not just in India but also in many Southeast Asian countries such sa Indonesia and Thailand.

At the same time, investor interest has been rising. Physically-backed ETPs have set yet another record, testing 2,500 tonnes. On the Comex, speculative positioning has risen to a six-month high. Such speculative demand is generally fickle and at the earliest opportunity the less-committed longs will exit the market resulting in a price correction.

It is also necessary to bear in mind, the world silver market is in surplus and therefore the latest price spurt may not sustain for long. Indeed, silver runs the risk of a price collapse should gold prices begin to start correcting.

According to technical analysts, gold looks bullish and gains can be expected to extend toward the next target of 1,790 and then 1,805. A break above this will take prices one leg higher. As for silver, a move above the 35 area would signal further upside toward 37.50. The medium-term outlook is bullish,

Base metals: The entire complex had a great shot in the arm last Friday after the US Fed launched the much awaited third tranche of quantitative easing. Copper climbed to a four-month high ($8,363/t) and aluminium gained a whopping 9.5 per cent to end the week at $ 2,200/t.

The big question bothering market participants is whether the rally will sustain. Clearly, growth momentum is slowing in most major economies. This surely is a downside risk to demand in the last quarter of the year. Fundamentally oversupplied metals such as aluminium and zinc could see the existing surpluses expand. A silver lining is however provided by approvals recently given by the Chinese Government for infrastructure projects. Investment of several tens of billion dollars on these projects would mean additional demand for aluminium, copper and zinc.

According to technical analysts, the upside extension of copper provides scope for hiking the target to 8,500 area next. In aluminium, an absence of topping signals points to a move higher toward 2,250 area. The medium-term outlook is bullish.

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