In a week of worsening macroeconomic uncertainty going hand in hand with no signs of a decisive policy action in Europe, global commodity market participants are perhaps beginning to imagine a repeat of the spectre of collapse that enveloped the world almost exactly this time of the year in 2008.
Commodity markets – especially energy and base metals — faced the brunt of worsening sentiment, loss of confidence and fears of demand compression amid slowing growth in major Asian economies and turmoil in Europe.
While Brent crude fell below $100 a barrel, base metals continued to face headwinds and agricultural prices fell over the past week due to risk aversion and firm dollar.
ICE sugar fell to a fresh 21-month low on Thursday. Week-on-week, oil was down and so were most base metals.
A major gainer was of course gold whose safe haven status was suddenly rediscovered on Friday when the US payroll data fell below expectation.
After languishing for months, the yellow metal received a major shot in the arm with prices spiking to well above $1,600 an ounce.
Where would the markets go from here? It is a tricky situation.
The month of June will witness a series of important events each one of which can potentially impact commodity markets. Meetings of US and European policymakers, FOMC meeting, G-20 summit, elections in Greece, OPEC meeting and more are listed.
Each one of these events brings with it some risk directionally to commodity market prices.
As the outcomes of these scheduled meetings are uncertain and price risks are difficult to quantify in either direction, experts recommend setting sector weights to neutral this month.
However, looking at from a fundamental perspective, oil has the highest potential for a price rise because of the highly supportive fundamentals.
Despite slowing growth in Chinese and Indian oil demand, the US demand is improving supported further by OECD Pacific demand.
Gold too is most likely to regain investor interest in the midst of uncertainty.
On the other hand, deteriorating growth picture means base metals market will stay under downward pressure until the macro picture improves.
Gold: Disappointing US payroll data on Friday and weaker dollar reignited interest in the yellow metal which saw investors flocking to it.
In London, the PM Fix was $1,606/oz, up from the previous day's $1,558/oz. Later, prices went past $1,620/oz in New York.
Silver bucked the trend with Friday AM Fix in London at $27.38/oz, down from $28.10/oz the previous day.
As if on cue there is a chorus about the possibility of further quantitative easing. Many gold bulls who have been betting on such easing have been utterly disappointed in recent times as the need for easing has somewhat receded; but surely not ruled out.
The big question once again is whether there will be QE3 soon, the expectation of which has boosted gold. This writer believes the time is not ripe yet for QE3 to happen.
Although macroeconomic data are far from inspiring, but they have to turn even worse before decisive action is implemented. Because almost all assets are perceived to be turning risky, gold seems to be the least risky asset currently.
No wonder, funds are expected to flow to this asset.
Meanwhile, physically-backed ETP holding are resilient; but any outflows will trigger a price collapse. To be sure, physical market demand is tepid. In India with prices crossing Rs 30,000 per 10 grams there will be further consumer resistance. China is slowing down too. Like India's, Chinese imports this year are likely to be lower. It is only investor interest that can support gold prices. However, investor sentiment more often than not is fickle. Friday's price spike has now raised hopes of a further rise in gold prices among the bulls.
The technical picture is supportive of a further rise in gold prices.
The recovery bounce in gold is extending toward the next target in the 1,640 area. Above that would signal upside toward 1,700.
Silver seasonality points to a weak month ahead. One can expect 26/30 range trade.
Base metals: The complex has faced sell-off with sentiment souring amid global growth concerns and slowdown in Europe and China.
For base metals market to regain confidence, sustained flow of positive macroeconomic data is necessary.
As yet it is unclear how the picture will pan out in the coming months. There is expectation that in the second half, the global growth momentum will improve and China will show signs of reversing the slowdown.
In the event, metals such as copper will benefit. So, price dips in Q2 may be viewed as buying opportunity to position for H2 strength. On Friday LME cash copper was $7,373 a tonne and aluminium $1,935/t.
Technical picture suggest a close below the 1,990 area in aluminium would confirm a bearish view toward 1,955 and then 1,825.
Copper is seen moving toward the next target area near 7,100 ahead of important support in the 6,925 area.
Crude: According to technical analysts, for Brent, a close below 97.70 would signal an extension toward the next target near 92 and then 90. Below 82.50 in WTI opens the next target near the 75.00 range lows. Medium-term outlook is bearish.