Exchange traded commodity sell-off seemed to be the theme in April when prices of a large number of global commodities declined, reminiscent of happenings exactly a year earlier. Crude oil, base metals and precious metals were all down month-on-month.

The sentient was driven by a combination of factors including in the main renewed concerns over the US economic recovery, slowing headline growth, little sign of overt policy change in China and decent supply availability, as an expert pointed out adding that some of the sell-off could be an overreaction based on current physical market conditions.

In the euro area, domestic demand has deteriorated along with exports. No wonder, the ECB responded by cutting rates, signalling the possibility of more action.

In Japan, the BoJ is expected to continue in its easing path; and in the US, one may expect the Fed to stay on easing course through the year.

However, it is perplexing that commodity prices are not gaining upward traction despite strong measures of monetary easing.

The question that springs, therefore, is whether liquidity driven commodity price boom has ended and whether market fundamentals and genuine physical demand will reassert themselves to influence prices. Given the current sentiment, looking ahead this quarter, it is reasonable to believe there may not be a sustained broad-based commodity price gain. The current sell-off may look overdone, but any price recovery from here is likely to be mild, divergent and difficult to sustain without an improvement in growth. So, macro data have to be watched for advance signals.

In the crude market, relative weakness is likely to be maintained till the tail end of Q2, while in base metals and industrial metals the demand environment remains soft.

Stronger growth signals and sustained demand pick up alone can stimulate the market so as to bring back some confidence. Gold prices remain at the mercy of investor interest which in any case has been waning. As for agriculture, most major markets have already turned soft following a huge rebound in production.

If April as a whole represented a month of sell-off in exchange traded commodities, last week was mixed for the commodity markets with sentiment dominated by macro-economic data, central bank policy decisions and financial market sentiment.

Weak data from China triggered another round of base metals sell-off, wiping out the previous week’s short-covering induced gains.

Precious metals

In gold, ETP holdings continued to decline with outflow of 176 tonnes in April. Aggressive liquidation has meant investment flows have turned negative with $7 billion outflow. At the same time, US mint gold coin sales hit a 40-month high.

Prices fluctuated last week as ETP outflows hit a record. In London on Friday, gold PM Fix was $1,469 an ounce, unchanged from the previous day. However, silver bounced back with Friday AM Fix of $24.25/oz versus the previous day’s $23.69/oz. Platinum ended the week at $1501/oz and palladium $694/oz. Physical demand was weak as China went on a 3-day holiday last week.

In India, prices have traded below Rs 27,000 for 10 gm but buying interest is more seasonal and is expected to decline soon.

As rural areas prepare for the upcoming planting season, physical demand will be muted over the next four months. Policymakers continue to tighten the screws on gold imports, consumption and speculative trade.

At the same time, buyers are expecting a further price correction towards Rs 25,000 in course of time. Unless price goes up and stays above $1,500/oz, outflows from ETPs will continue.

However, far from rising, gold prices seem poised for a further decline towards $1,400/oz and even well below that level in the coming weeks. This correspondent firmly believes that although asset purchase programme in the US will continue for some more time, the Fed will slowly but surely start to reduce the value of such purchase in the months ahead. This will pressure gold prices further.

According to technical analysts, gold faces resistance at 1,520 and 1,485 while support is seen at 1,440 and 1,405.

Base metals

Interestingly, LME prices staged a rally on Friday with reports of ECB rate cut and the US the unemployment data falling to a 4-year low of 7.5 per cent.

Copper rallied by over six per cent to $7,244/t. Aluminium was $1,847/t.

For most metals, Chinese import and consumption data will continue to impact market sentiment.

Aluminium market which is in structural surplus may begin to see some much-needed production cuts. This will bring some discipline to the market, according to experts.

Technical analysts said copper momentum is neutral. They see resistance at 7,400 and then at 7,330 while support is seen at 7,050 and 6,750. The seasonal bias for base metals is decidedly bearish in May.

Crude

The market has come under pressure again with the Brent benchmark trading below $100 a barrel last week. The physical markets are well supplied while demand side looks steady.

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