The Hindu Business Line : Gold prices may ease; crude to stay above $50

Mumbai, April 12 After hitting multi-year record highs in the previous 3-4 years largely unconnected with market fundamentals, the alarmingly rapid collapse of commodity prices in a few short months in the second half of 2008 had created a deep sense of panic among market participants. That panic resulting in extreme caution is now giving way to a more nuanced approach to commodity investing as the world comes to grips with recessionary conditions and governments scurry to beat the slowdown.

Neither greed nor fear, but pragmatism is returning to the commodities complex.

Concerns

Commodities including energy products, industrial metals, base metals and agriculture are no more untouchables. This clearly is the message from the commodity market behaviour during the first quarter of 2009. To be sure, the market has not returned to the pink of health. There surely are serious demand side concerns. Producers are responding with output cuts. Inventories are still large.

The market is in transition; and it is back to basics or fundamentals.

Geopolitics, speculative capital, currency and inflation – major non-fundamental factors - have currently taken a backseat. The effect of economic slowdown and response, thereto, has impacted different commodities differently. This is because the three wheels of demand impact, supply response and sentiment are turning at different rates across the commodity complex. This is a genuine traders market dominated by relative values, assert experts.

Obviously, extreme caution is necessary in commodity investment. For instance, within the metals sector, some industrial and base metals have performed well despite weak fundamentals.

In fact, among all assets, base metals have given the best returns so far this year.

Crude is another such commodity. Yet, at some stage, and sooner rather than later, fundamentals will catch up, especially in base metals complex.

In all precious metals, speculators have built large long positions on Nymex and Comex. This suggests the market expectation of a price rally.

Gold

Despite its famous safe haven status, weakening investor interest caused by somewhat positive macroeconomic prospects and improving equity market has resulted in prices dipping below the $900 an ounce level.

In the London spot market last Thursday, PM fix was $880.50/oz, little changed from the previous days $880.00/oz. Silver AM fix was at $12.30/oz on Thursday, edging up from $12.28/oz the previous day.

It may be necessary to recall that last year, prices initially found support around the mid-800s as jewellery demand returned to the market. If gold sheds another $30-40, there is every possibility physical demand would improve. Traders are betting on the start of the wedding season in India.

However, at around Rs 14,400/10 gm, the yellow metal is still exorbitantly priced for average household consumers.

While the seasonal factor may improve the sentiment, actual offtake of gold in Indian market may not be so encouraging. While buying will continue, physical volumes will shrink.

Despite short-term weakness, anticipated dollar weakness and inflationary environment over the longer term may prove supportive to the gold market and encourage investors to increase their exposure to the metal.

According to technical analysts, the sentiment is bearish and gold may test 850/55 area this month.

Rallies could be capped at around 890, but bearish risks are increasing in the short term.

Base metals

The complex put up a strong performance with most metals trading higher. Lead was up 5.2 per cent and aluminium three per cent. Copper prices closed on Thursday at $4,529 a tonne, above $4,500/t for the first time since October 2008, spurred by lower stocks, cancelled warrants and strong equities.

On the negative side, the OECD composite leading indicators signal a further deterioration of economic activities in major countries. The deep slowdown in OECD area has spread to the emerging BRIC group as well. European data continue to deteriorate with decline in manufacturing activity. The relationship between economic activity and metals demand is well established.

From a fundamental perspective, the prices of many metals look overvalued. The rally is primarily the result of short-term non-fundamental factors.

Soon, a weak demand and rising inventory will catch up, making the rally unsustainable and eventually ripe for correction.

Aluminium could be at most risk of a price correction as recent higher prices have reportedly encouraged production restarts. On the other hand, copper has moved up with the support of Chinese buying and scrap tightness.

For copper the downside is better defined and the current factors may provide support from a big collapse. A 20 per cent decline in copper prices is seen as the worst case scenario.

Lead prices may turn softer because of seasonal demand weakness, while zinc is sure to find support at above $1,000/t. Nickel and tin have found short-term strength, but are at risk of eventually testing recent range lows.

According to technical analysts, aluminium has been chipping away at the 1,490/1,500 resistance area in recent days. This zone is expected to give way decisively, igniting further gains this week. Close above 1,500 is a bullish signal for the rest of the month.

Crude

Volatility has characterised the market last several days. Crude has traded on either side of $ 50 a barrel. In the short-term, broader macroeconomic sentiment has once again reasserted itself on prices. While inventory overhang, especially in the US, continues to be a matter of concern, the supply-side issues are more pronounced. Voluntary OPEC output cuts and slipping non-OPEC supplies cannot be ignored. The oil market balances are sure to tighten as weeks and months roll by.

As the sentiment turns constructive and fundamentals improve, there is an upside price potential. In the current quarter, WTI could average $50 and Brent $53 a barrel, with the possibility of a 10 per cent movement on either side. Overall, the market is more likely to stay above $50.

Related Stories:
Weak $, investments to push gold higher; crude buoyant
Gold may resume uptrend; crude, copper set to move up
Gold to trade range-bound; crude will stay firm

More Stories on : Gold & Silver | Commodity Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Service in sky may be 5-star, but on ground, it’s different

Corporates not in a hurry to buy back foreign bonds

G-20: For the greater common good?

No Olympic title for shoe throwing

Power capacity addition targets go for a toss

Indian Overseas Bank (Rs 52.05): Buy

Day Trading Guide

Satyam staff worried new employer may cut jobs

Main suitors for Satyam… but will there be a dark horse?

Satyam board has right to reject low-priced bids

Bearish reversal seen for gold

Gold prices may ease; crude to stay above $50

Hope of long-term growth may give market a boost

FIIs reduce stake in March quarter too, but only marginally