Stiff economic headwinds and political uncertainties, especially in Euro zone, continue to batter global commodity markets with the currency factor playing a decisive role.

Commodity markets are torn between weakening economic outlook and constructive fundamentals in many cases.

Sentiment seems to be winning for the present.

What 2012 will unveil is the latest topic of animated discussion among market participants.

Oecd indicators

While the OECD leading indicators signal continuing slowdown across major economies, recent data would suggest that the rate of descent has slowed in recent months.

It is important not to lose sight of the fact that the US data suggest above-trend growth, especially in commodity consumption.

The world's largest economy is giving out positive signals and maintains decent momentum, an expert commented adding infrastructure and construction spending must pick up markedly for the economy to break out of the low growth trap.

On the other hand, China continues to dominate the commodity market headlines; but the leading indicators have just begun to capture market concerns.

China's November data

There is a view that weight given to China in the OECD+6 indicator is small. Be that as it may, China's November trade data continue to paint a picture of robust commodity demand.

Import of copper, coal, crude oil and soyabean hit their highest levels for the year to date, and iron ore imports second only to January levels. But this is at odds with the recent dip in business confidence and evidence that economic growth is slowing.

As for crude steel, the latest published data disclose a dip in global production.

For November, the output fell 4 per cent month-on-month to 1,405 million tonnes (mt) on an annualised basis.

This is the fifth month in a row that the run rate has been below 1,500 mt, with the fall attributed to downturn in China's crude steel production.

Yet, production was still up one percent year-on-year, suggesting robust numbers despite challenging macro environment.

There is reason to remain positive on the outlook for commodity assets in the first quarter of 2012.

As said earlier, prices have been dragged down by sovereign debt concerns despite supportive fundamentals.

So, even a modest recovery in business confidence could result in quite a sharp move up in commodity prices.

At the same time, one must hasten to add, fears over the health of China's economy continue to grow. So, will the strength of November trade data sustain or is it just a final blow-off before a steep descent in commodity import demand in 2012?

This multi-million dollar question is on top of every market participant's mind.

Gold: Oscillating between hope and despair, and the currency dynamics playing the joker in the pack, precious metals performed reasonably well over the week except for silver which was down 1.9 per cent.

Amid end of the year thin trading, gold ended the week above the psychological $1,600 an ounce.

Platinum and palladium prices were up. While palladium was up 4.6 per cent, the other two were up by a modest 0.8 per cent each.

On Friday, in London, gold PM Fix was at $1,608/oz, virtually unchanged from the previous day's $1,607/oz.

Silver was a loser with Friday AM Fix at $29.22/oz as compared with the previous day's $29.30/oz.

While physical demand continues to provide support on the lower side, demand for the dollar and thereby its relative strength continues to cap the upside for the yellow metal.

Risk aversion and need for liquidity are still keeping market participants on tenterhooks.

Tactical investors are seen scaling back their exposure across precious metals.

Rapid weakening of the rupee has propelled the prices of the yellow metal in India to levels that are unaffordable for household consumers.

Overall, the expectation is that the rupee would continue to remain weak for an extended period of time. In the event, international gold prices have to fall substantially lower from the current levels to regenerate genuine physical demand. On current reckoning, it appears unlikely.

Base metals: Low volumes marked the week's trading.

Copper gained 4.1 per cent over the week as exchange stocks declined, while lead closed back above $2,000 a tonne.

As positions are closed ahead of the year end, open interest for LME metals continues to decline.

Over the past two weeks, 3-month contract open interest is down 7 per cent for copper, zinc and aluminium, 5 per cent for nickel, 3 per cent for lead and 8 per cent for tin.

With most 3-month prices down over this period, this suggests length has been neutralised for all except nickel, commented an expert.

As stated in these columns earlier, the metals market has factored in weak European demand conditions.

So, any negative surprise will have to come from China. It is critical Chinese numbers are closely monitored for advance signals.

Crude: The market continues to remain under pressure as risk aversion persists.

Sustained flow of more robust macro data is necessary for the market to shake-off the negative sentiment.

> gchandra@thehindu.co.in