Pressure on gold continues

Yet another week of volatile conditions in the global commodity markets saw prices of energy, metals and select agriculture move lower with price action driven by a combination of renewed fears over the European sovereign debt crisis, continued negative attitude to risk (read risk aversion) and of course a stronger US dollar.

While oil prices fell sharply over the week (WTI down 5.4 percent), volumes were thin. The OPEC meeting passed off quietly with no change in the policy. The group decided to maintain current production levels of 30 million barrels a day. Key participants are expected to defend prices at current levels.

All the precious metals suffered but gold was badly hit with a weekly fall of 6.7 percent, with prices reaching the lowest since July. The metal is struggling to fight the triple attack of dollar strength, risk reduction and need for liquidity. Contrary to some expectation, the FOMC statement did not hint at any further quantitative easing. This exacerbated the already weak sentiment. Silver was worse with a fall of 6.9 percent. Platinum (-4.8 percent) and palladium (-6.9 percent) were the other losers.

Going forward, attitude to risk and global economic prospects will remain the key drivers of global commodity markets, at least in the short-term. Will the growth concerns start to ease anytime soon? No one knows. If financial market improves, overall business sentiment shows signs of positive change and China pursues pro-growth policies, there is good chance of a price rebound in many commodities in the first quarter of 2012. Growth commodities with tight fundamentals are the ones to watch for to demonstrate robust price performance.

Gold: Prices have once again come under intense pressure, with the yellow metal closing at the lowest level since July this year and platinum since December 2009. In London on Friday, the PM Fix was at $ 1,594 an ounce, edging up from the previous day’s $ 1,574/oz. Although there has been some support from physical demand, the need for liquidity weighs.

Physical demand has been more muted than expected and huge volatility of recent weeks has only added to the uncertainty and put off buyers. The situation has been exacerbated by the fact that consumers in the world’s largest gold market India have benefited little from global price fall because of the rapidly depreciated rupee which has made gold expensive.

Gold prices will have to fall further in dollar terms to generate genuine physical demand in India. Additionally, one needs to watch ETP holdings. If they remain stable it may support prices. The macro backdrop continues to remain supportive of the yellow metal - inflationary pressures, economic uncertainty and environment of negative real interest rates, an expert remarked.

In case of silver, investor interest is weak. Tagging on to gold’s coattails, in London on Friday, the metal’s AM Fix was $ 29.78/oz, marginally up from the previous day’s $ 28.80/oz. Softer industrial demand outlook exposes silver prices to the downside.

According to technical analysts, near-term risk for silver is an uptick towards 31 before resuming lower through 28 toward the lows near 26. In gold, choppy range trading can be expected till the year-end. A close below 1530 would signal a bearish sentiment towards 1400. The medium-term outlook is neutral.

Base metals: The entire complex suffered price reverses last week with the worst sufferers being lead (-9.5 percent), followed by tin (-7.2 percent), zinc (-6.4 percent) and copper (-6.0 percent). Nickel fell the lowest (-0.1 percent). On Friday, some price gains were recorded on the LME with copper closing at $ 7,329 a tonne and zinc at $ 1,868/t.

The market mood continues to be impacted by weakening outlook for Europe; but many believe, the weak growth outlook has been priced-in already. Although China has been a bright spot so far, concerns over the economy – whether or not it will have a soft landing - have not disappeared. So, negative surprises if any must come from China.

While the future certainly looks uncertain, what one can be reasonably sure about is the improbability of a 2008-type price collapse. Global inventories are low, China’s destocking cycle has ended and monetary stance is easing. A further round of pessimistic macro data can of course come as a spoiler.

Technically, copper prices look increasingly vulnerable to an upside movement, but a move below 7100 will confirm bearish move towards 6950 area. Aluminium too does not inspire an upside, but 1825 area looks the next plausible target. In the medium-term, expect range-bound trading.

Crude: With OPEC policy remaining unchanged, renewed fears over eurozone, risk aversion and firmer dollar combined to push prices down sharply amid thin trading volumes. Producers are likely to continue to defend prices at the current levels.

As the sentiment is far from robust, a further bout of price fall cannot be ruled out, although fundamentals continue to remain constructive. The tug-of-war between sentiment and fundamentals continues to favour the former.

The technical picture suggests, former trendline support near 105 provides selling interest for the next leg lower in Brent towards the target near 100. WTI looks bearish and poised for a move toward 90 area before looking for a base. Medium-term outlook is neutral.

Agriculture: Macroeconomic headwinds and stronger dollar have weighed on farm commodities. Wheat market is in surplus with projected production exceeding consumption leading to higher stocks. Cotton fell to a fresh low since August 2010 following strong supply outlook and apprehensions of a demand slowdown. Soyabean was an exception last week with prices edging higher because of dry weather conditions in Brazil and Argentina.

gchandra@thehindu.co.in

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