Commodity market participants across the world are keenly monitoring the developments in two key events, both of which involve the US. One is whether the US will launch a strike against Syria; and the other, Fed announcement of tapering of asset purchase in its meeting this month (September 18).
If not so much the former, the latter is becoming increasingly certain. The US economy added 1,69,000 non-farm jobs in August and the unemployment rate fell to 7.3 per cent according to the US Labour Department.
Although the number was below the consensus figure of 1,80,000, many believe the jobs data created conditions favourable for start of tapering.
While markets have largely priced in the Fed tapering as asserted by experts, at the same time, business sentiment has begun to improve, notably in Europe. “The path to recovery for advanced economies is unlikely to be smooth, and the ability of emerging markets to withstand capital outflows is being tested", succinctly oberved an expert, adding depsite fall in currency and equity markets, EM commodity demand may not be affected to any notable extent.
Importantly, China’s economic activity indicators have picked up with hard-landing fears abating.
So, once again, a potent combination of macro data flow, geopolitics and monetary policy will impact commodity markets in general in the coming days. While positive data and geopolitical instabilities can potentially push commodity prices up - especially industrial metals and crude - tapering will most likely cap the upside. Fundamentals will once again assert themselves, such as for base metals most of which are moving to a state of surplus.
However, in crude, market balances are tightening.
Last week, all precious metals were down, with palladium the worst performer suffering 3.9 per cent price decline followed by silver 2.5 per cent. Platinum was down 1.1 per cent and gold by 0.6 per cent. The yellow metal fell below $1,400 an ounce over the week.
On the other hand, base metals were mixed. With marginal decline, lead and zinc were exception to the general upward movement in prices. Tin registered an outstanding performance gaining a whopping 9.2 per cent following reports of disruption to shipments from Indonesia, as a result of changes in local market regulation.
On LME, cash tin ended the week at $22,970 a tonne. Nickel gained 1.3 per cent and others edged up marginally.
Oil WTI was up 2.3 per cent over the week with crude oil prices remaining at the top of the trading range.
So, over the coming week, the market will continue to look for advance signals and triggers. The uncertainty is already palpable.
Volatile conditions are likely to prevail. The one real relief is that global food prices have continued to drop in the wake of production rebound and comfortable availability.
Gold: In the last two or three weeks, gold prices benefited from a combination of rising geopolitical tensions, weaker equity markets and weaker dollar; but towards the end of last week, prices settled lower as other assets retraced some of their tension-driven moves, according to experts.
Also, short covering activity that had buoyed gold prices may be drawing to a close as gross short positions have eased to their lows. However, despite overall decline over the week, precious metals rallied on Friday on expectation that weak US employment data reduced the prospect of a prompt tapering of QE program by the US Federal Reserve.
On Friday in London, gold PM Fix was $1,387/oz, up from previous day’s $1,385/oz. Platinum closed at $1,498/oz ($1,487/oz) and palladium $699/oz ($689/oz). Silver was an exception with Friday AM Fix at $23.05/oz versus previous day’s $23.52/oz.
ETP outflows have slowed, while inflows into gold ETPs have been rather small, although net flows are still negative.
Ahead of the September FOMC meeting, the unwinding of bearish positioning in gold that started last week is likely to continue. So, investor demand is weak and physical demand is yet to pick up momentum.
The world’s largest import market, India is entering its seasonally strong demand period. Yet, given the fact that the rupee is enervated - having depreciated by over 15 per cent in four months - and import regulations have been tightened, and rupee price of gold has again breached Rs 30,000 10 gm, physical demand is most unlikely to be robust.
The saving grace will of course be the very large number of weddings and festival season demand over the next two months.
Bullion imports in the first two months of the current quarter have already tapered down substantially.
There is talk of import into India through unofficial channels (smuggling).
However, these reports are largely anecdotal and often exaggerated, and unverifiable. It is also possible some interested persons float such trial balloons to see if policymakers will fall prey.
So, the downside risk to gold prices in dollar terms is high as potentially shrinking liquidity, stronger dollar and equity markets wean investors away from gold.
However, the benefit of such a fall in prices will not be available to Indian consumers in full measure given the high level of import tariff (10 per cent ad valorem) and a considerably weak rupee.
Technically speaking, the momentum for gold is bearish. Resistance is seen at $1,435 and then at $1,415, while support may be available at $1,350 and then at $1,315.
For silver, selling interest near 25 helps keep the focus lower. Below 23 would open target near 22 and then 21.
Base metals: On LME on Friday, cash copper closed at $7,131/t and aluminium $1,777/t.
Tin was a standout performer because of declaration of force majeure by major producers in Indonesia following changes in local market regulation. The latest PMI and other macroeconomic data pointed to a more positive outlook for industrial demand.
Copper prices are widely expected to hold on to the current levels for the rest of the month. However, if macro data continue to improve, there could be upside surprises even as the copper market is being increasingly driven by rising supplies and a move towards surplus.
Technical picture suggests, the overall focus for copper is lower. Momentum is bearish. Resistance is seen at $7,400 and $7,300 while support is seen at $7100 and $7,000.
A break below $7,080 may confirm the next leg lower in copper toward $7,000.
Crude: A combination of geoplitical tension and tightening oil balances have ensured that prices are at the top end of the trading range.
Under the circumstances, easing tension may result in a pullback even as medium-term the fundamentals look constructive for a price rise.