Global commodity markets, so far this year, have gone through wide swings given the diversity of driving forces including economic growth, monetary policy, geopolitical instabilities and currency gyrations.
Central banks of different countries have often followed monetary policies that are seemingly divergent. The economic growth trajectories of different countries have also diverged.
The risk-on/risk-off environment too has undergone subtle but unmistakable changes. No wonder that the risk-reward profile of commodities has not been the same this year.
Energy and industrial metals are growth commodities; and these markets have been subjected to different risks and drivers, and by implication, the return on investment too has varied.
While geopolitics driven supply uncertainties have pushed the crude market up, slowing demand and improved supply prospects have capped the upside for copper. With emerging risk-on environment, gold has lost its sheen even as investors have begun to steadily exit this so-called haven asset. The situation is unlikely to change anytime soon.
Last week proved positive for precious metals, mixed for base metals and indifferent for crude. In London over the week, platinum outperformed with a rise of 5 per cent to move well above $1,400 an ounce levels, followed by gold with a rise of 4 per cent, palladium 3.5 per cent and silver 1.6 per cent in value.
As for base metals, tin and aluminium were down 3.2 per cent and 1.8 per cent respectively while lead outperformed with a gain of 3.5 per cent followed by nickel 2.1 per cent. Copper edged up 0.6 per cent.
Going forward, as said earlier, uncertainties are expected to continue. Fundamentals of individual commodities will have to be watched. In some cases like crude they are constructive while in some base metals, the market could get into surplus. Liquidity and currency factors will have their play.
With these uncertainties, there is a chance that the US Fed may not begin tapering in December but postpone it again for some time in 2014. So, it may be prudent to avoid far forward positions.
Gold: losing sheen
Despite supportive environment covering growth uncertainties and dollar weakness, the precious metal has failed to gain upward traction and if anything, has struggled to stay above the $1,300/oz levels for a sustained period of time. Obviously, gold’s haven status is under challenge. Prices have been on a downward spiral for the last six months.
Physically -backed gold ETPs continue to face outflows with current holding estimated at a little over 2,000 tonnes (May 2010 lows), while investor interest is enervated.
Physical demand is nothing much to write about, except for some glimmer hope in Chinese demand. Last week saw prices jump after the US decided to postpone its problems – mainly, debt ceiling deadline – to a future date. The rates rallied above $1,300 ascribed mainly to short-covering.
In London on Friday, gold PM Fix was $1,317 edging lower from the previous day’s $1,319. Platinum closed at $1,438 versus the previous day’s $1,420, extending its premium over the yellow metal. Palladium too moved up to $737 ($723). However, silver bucked the trend to a Friday AM Fix of $21.87 from the previous day’s $21.72.
There is now a general consensus that gold has run out of steam having failed to react to the US debt dispute and having run out of positive factors. The metal is likely to struggle hard to stay above $1,300/oz.
One can safely expect, barring unforeseen exceptional developments, that gold prices will remain under pressure rest of the year and will ease further over the course of 2014.
Metals: surplus
The market is buffeted by rising supply expectations on the one hand and lack of confidence in robust demand on the other. No wonder, LME week participants could hardly come to any definite conclusion about the future trajectory of the complex.
Rapidly expanding supply is seen driving surpluses in the market, especially for copper.
On Friday, LME cash aluminium closed at $1,802 a tonne, copper at $7,222, lead $2,153, nickel $14,147 and tin $22,675.
The report of International Nickel Study Group released last week showed strong supply growth and an implied market surplus of 108,000 tonnes in the first eight months of the year.
With new capacities being ramped up, the surplus is set to rise over the next two quarters.
Technical analysts suggest copper momentum is bullish. Resistance is seen at 7355 and 7300 while support may be available at 7135 and 7080.
Crude: drifting
Market fundamentals are easing. Demand concerns are ebbing, an expert pointed out. Brent prices could be driven lower.
However, the downside risk to prices looks limited. Brent may drift lower to average $ 105 a barrel for the rest of the year.