After weeks of uncertainty and pessimism in the backdrop of weak global growth signals and European sovereign debt crisis, the global commodity markets perked up last week following a positive agreement the EU summit produced on Wednesday which helped tone down the risk perception.
Earlier in the week, the markets covering energy, base metals and precious metals saw choppy price moves in the context of none-too-encouraging macro picture. With risks perceived as considerably weaker now, fundamentals have begun to assert.
Soon after the EU summit announcements, the markets witnessed what is described as a Euro relief rally. Prices in the entire metals markets gained traction. Base metals and precious metals prices surged higher across the board.
For instance, LME copper surged past the $8,000 a tonne mark, while silver led the precious metals complex with an attractive 15 per cent rise week on week. Hitherto volatile crude market saw prices break higher last week.
It is of course no one's case that the relief rally is the beginning of a renewed bull market for commodities; far from it.
While the US macro data are generally seen favourable (except for employment) and EU debt crisis is agreed to be addressed, there are other concerns such as over China.
Will the Asian major have a hard-landing or soft-landing? What will the leading indicators in the coming months suggest? No one is sure.
What one can be sure about is that market expectations are now calibrated higher. However, one must hasten to add, despite the EU agreement that can potentially remove a major roadblock of global economic uncertainty, the overall situation remains fragile and fraught with possibilities.
Constraining European situation, geopolitical instabilities, regulatory controls, currency dynamics and weather remain nearly intractable. In many commodities, investor interest is the key.
Whether they will return in greater numbers is yet unclear; but logically one can expect that investor appetite will kick in after a period of risk aversion in which cash was king.
Gold: The entire precious metals complex was up last week as the market reacted positively to the EU agreement. Silver turned out a stellar performance up nearly 15 per cent week-on-week.
Gold was up 6 per cent surging past $1,700 an ounce. The yellow metal detached itself from the equity market last week. Investment flows have turned positive.
In London on Friday, the gold PM Fix was at $1,741/oz, up from $1,718/oz the previous day. Silver AM Fix for Friday was $35.42/oz, up from $33.55/oz the previous day.
Physical demand has continued to cushion the downside. ETP inflows are improving. The backdrop has turned gold positive. Increased investment demand will propel prices higher. Silver is likely to struggle as the fundamentals are weak (the market is in surplus).
Physical demand and investor appetite can drive prices higher.
According to technical analysts, a clear break above the 50-day average near 1740 will open the next higher target in the 1790 area before looking for a top.
In silver, there is reason to be near-term bullish, targeting 35.15, then 36.55. Medium term outlook is bullish.
Base metals: The latter half of last week saw prices in the entire complex record strong gains on euro relief rally as risk perception stood diluted in the wake of EU summit producing an agreement that was generally acceptable.
Copper led the pack with a gain of 14.4 per cent week-on-week while zinc gained 10.2 per cent. Cash LME copper was $8,170/tonne on Friday.
Hurdles to further upward price movement include constraining macroeconomic issues in Europe and concerns over China's growth. Be that as it may, fundamentals in some cases are turning increasingly positive.
For instance, copper in which LME stocks are falling, Chinese refined imports are record high and supply side constraints are visible. Tin, nickel and lead are other base metals in which China will play a decisive role in setting price direction.
On the bourses, new long positions have been built in aluminium, copper, nickel and zinc.
While aluminium prices have been testing the marginal cost of production, in case of copper, as said many times before, the market is fundamentally tight, despite the fact that financial market participants focused less on fundamentals and more on growth concerns.
Zinc supplies are tightening as mines cut output due to protracted weak prices and the Chinese have been destocking.
Technically, the upside range break in copper means a move towards the 8,250 area.
Aluminium needs to close above 2,270 to extend the recovery towards 2,390 before sellers resume the greater down-turn. The medium-term outlook is range-bound trading.
Crude: The market went through another volatile week; but with clear signs that the prices were constantly breaking higher, notwithstanding less-positive sentiment.
Fundamentally the market is tight but prices are struggling to break higher because of the softness in demand so far.
With no signs of improvement in non-OPEC supplies and geopolitical concerns still in the air, the market is constructively poised.