In the global marketplace, still enveloped by weak sentiment, two events of last week can potentially exert steady but significant impact on commodity markets.
One was the announcement of China’s macroeconomic policy framework in the form of central budget and economic targets for 2013 and the other, the US employment data for February.
From available details, it is clear that China is likely to moderate the increase in infrastructure outlays and such moderation in spending will result in a steady but modest pick up in commodity demand this year.
At the same time, the US jobs data for February released on Friday surprised to the upside. The non-farm payrolls increased by 2,36,000 jobs, ahead of market expectations of 1,65,000 jobs; and the unemployment rate fell to 7.7 per cent from 7.9 per cent.
However, the US still has a long way to go before jobless claims return to normal levels. This also means, the US monetary policy will remain dovish for some more time until more concrete evidence is available about sustained growth and employment. Incidentally, last week, the ECB left its monetary policy unchanged.
In view of these developments, the commodities complex was mostly range-bound to lower over the past week. Brent crude was seen consolidating at around $110 a barrel.
Base metals were relatively range-bound and ended in the positive territory except for aluminium and lead.
On the other hand, precious metals gained, except gold which remained unchanged; but silver performed well with a 2.7 per cent rise in price. Palladium is being supported by the ongoing supply concerns and growing signs that the world’s largest car market – China – is set for a strong year.
Even as the US dollar firms up, the equities market too is performing well, suggesting that risky assets will likely find favour with investors. This of course is negative for gold which is seen becoming increasingly vulnerable to a risk-on climate.
Worse, investor interest in ETP gold holding, long considered as stickier investment, is falling as evidenced by the largest-ever monthly outflow in February. Together with changing expectations of the US monetary policy, rise in equities is sure to pressure gold prices further down.
On the other hand, base metals demand is set to remain steady with China’s focus on infrastructure and budgeting to spend more on major transportation projects.
For crude, geopolitical elements continue to hover in the backdrop, retaining the uncertain nature of such developments which is generally perceived as constructive for the market. Firming dollar is another factor to reckon with.
Gold
Prices have stayed below the psychological $1,600 an ounce. The physical market in gold is said to be responding to a lower price environment; but investor interest which has almost always been the key is clearly fading. February witnessed the largest monthly outflow (estimated over 110 tonnes) of the yellow metal from physically-backed gold ETPs.
On the Comex gross short positions are hovering around levels last seen in 2005. This raises a fundamental question about gold’s safe haven appeal under the present circumstances. We have maintained in these columns that gold’s appeal will wane when equity market sentiment begins to improve. So, it looks like ETP redemptions and migration of investors to equity markets are set to combine to drive more weakness in gold, although the macro backdrop still looks gold-positive.
In London on Friday, gold PM Fix was $1,582/oz nearly unchanged from the previous day, while silver AM Fix was $28.78/oz, down 0.8 per cent from the previous day. For platinum the week ended with Friday PM Fix of $1,588/oz, marginally higher than gold. Palladium closed at $769/oz, up 1.9 per cent from the previous day.
In India, the world’s largest gold import market, consumer interest has stayed soft despite price falling below Rs 30,000 for 10 gm. The upcoming wedding-season should generate physical demand; but expectation of the rupee strengthening and consequent fall in domestic prices is said to be holding back potential buyers.
Going forward, the big question is whether Indian consumers will be able to enjoy the benefit of gold’s price decline in dollar terms. The rupee looks vulnerable.
Unless there develops a situation of firming dollar accompanied by a firming rupee (or at least not a falling rupee), consumers here are unlikely to reap any real benefit of overseas prices.
Base metals
Price action across the complex was relatively range-bound over the past week following the sharp sell-off since mid-February. According to experts, this stabilisation reflects the ongoing assimilation of policy messages from China. Many believe that a modest increase in central government infrastructure spending should be expected this year rather than anything more spectacular in China.
On Friday, LME cash copper closed at $7,711/t and aluminium at $1,923/t, both edging down from the previous day. Copper demand is expected to be stable during the next few months, with the possibility that demand may surprise to the upside. Prices too are likely to stay stable. Aluminium is likely to be an under-performer given the fundamentals.
Crude
Front-month Brent is again consolidating around $110-111 a barrel. However, the undercurrents present for oil prices are constructive. It is likely, prices will remain robust in the $105-110 a barrel range.