Just one hawkish sentence by Fed Chairman Ben Bernanke on Wednesday conveying the sense that if all goes well with the economy, asset purchases (quantitative easing or QE) will be reduced in the second half of 2013 and come to an end by mid-2014 set the tone for the global commodity markets last week, some of them such as precious metals rather sensitive to QE expectations.
Gold and silver fell sharply to September 2011 lows.
The question that arises once again is whether the liquidity-driven global commodity boom has come to an end or at least nearing its end. While the Fed’s approach had the biggest impact, one cannot ignore the supporting factors such as weakness in Chinese economic data and liquidity squeeze. Continuing the trend from April, China’s commodity imports in May remained subdued with key commodities down year on year. So, while gold and silver prices declined as a direct result of imminent QE tapering, the broad risk-off move in base metals has been driven largely by macroeconomic developments impacting the demand side and rising inventory levels.
No wonder then that all metals were down week on week.
While silver led the way with a sharp fall of 8.4 per cent over the week (Friday AM Fix $19.87/oz in London), gold was not far behind with a loss of 6.9 per cent (Friday PM Fix $1,295/oz). Palladium was badly hit with a price fall of 7.7 per cent and platinum 5.7 per cent. Oil WTI was down 4.6 per cent. Among base metals, the worst performers were lead (-4.2 per cent), copper (-3.8 per cent) and aluminium (-3.5 per cent).
Some experts, however, suggest that commodity markets have been relatively shielded from the impact of the recent sell-off in financial markets.
The commodity markets can expect a more independent, diverse and differentiated price performance. Not liquidity and resultant speculative froth but demand and supply fundamentals of individual commodities will once again assert themselves.
As succinctly observed by an expert, ‘the period of commodities trading, as a derivative of risk-on/risk-off sentiment, appears to be coming to an end’.
Gold
Silver led the massive sell-off in precious metals last week after the hawkish Fed press briefing pressured prices lower. This was not surprising given the metal’s weak fundamentals. The market is in a huge surplus.
In London, gold tumbled to breach the $1,300 an ounce barrier to a PM Fix of $ 1,293/oz on Thursday, slightly edging up the next day. Silver found itself under greater pressure to go down from Thursday AM Fix of $20.24/oz to a low of $19.87/oz on Friday. Platinum tumbled to $1,365/oz on Friday (lowest level since November 2009) from the previous day’s $1,391/oz and palladium $672/oz.
Gold ETP outflows have reached 490 tonnes so far this year; and with prices plummeting below $1,300/oz, more outflows can be expected as it opens up a new bracket of potentially cash-negative positions.
Net fund length has been on a downtrend for last several months and gross short positions are at a record high. Clearly, the investor sentiment towards gold has turned negative and is no more perceived as a safe haven asset assuring solid returns.
The Indian government continues to pose a threat to gold import and gold demand. Physical market sales have slowed with the conclusion of marriage season and onset of southwest monsoon spurring farm activities in rural areas. With the rupee substantially enervated and testing 60 to a US dollar, the benefit of overseas price fall has not flowed fully to Indian buyers.
Gold is likely to consolidate at around $1,300/oz levels in the next few days until some new price trigger appears in the market. Investors are unlikely to return to this precious metal in a hurry. According to technical analysts, gold’s daily trend is bearish. Resistance is seen at $1,320 and then at $1,300 while support is seen at $1,265 and then $1,240.While buyers have emerged at around $1,265, in the absence of basing signals, there is risk of extension toward $1,150.
Base metals
The market came under significant pressure over the past week. The complex bore the brunt of a twin attack in the form of Fed statement and weaker Chinese trade data. The liquidity squeeze in China if sustains can exacerbate the seasonal slowdown in metals demand.
In London, on Friday, LME cash copper was $6,785/t and aluminium $1,748/t. The International Nickel Study Group has estimated a 33,000 tonne surplus for the year to date. In lead a 31,000 tonne deficit year to date is seen while the zinc market is seen with a surplus of 49,000 tonnes so far, according to International Lead and Zinc Study Group.
Technical analysts see copper daily trend bearish. While resistance is seen at $7,190 and then $6,930, support is seen at $6,690 and $6,635.
Crude
Despite fall last week, there is little pressure for prices to go down further or remain subdued as there is no fundamental imbalance. The second half may witness demand pick up and some supply shortfall.