In a week of rapid developments that saw positive policy action in the troubled Eurozone and slowing China, not to mentioned strengthening expectations of further quantitative easing in the US, global commodity markets rallied significantly, especially on Friday. The entire metals complex covering base and precious metals was the star performer with euphoric price spikes.
Week on week, in the London market, all base metal prices were up with zinc (7.1 per cent to $1,970 a tonne), aluminium (6.7 per cent to $2,010/t), lead (6.0 per cent to $2,082/t) and copper (4.6 per cent to $7,959/t) leading the way. Not to be left behind, all precious metals rallied. Gold prices spur ted by 4.8 per cent, silver by a hefty 5.6 per cent, platinum by 5.0 per cent and palladium by 3.9 per cent. Later, in New York, the yellow metal extended its rally to touch $1,745/ounce but settled at $1,740/oz.
Despite the position that the global economic growth prospects are not exactly encouraging because industrial activity continues to be slow, the trigger for the price rally came from the European Central Bank’s announcement of bond buying programme and a Chinese decision to invest several billion dollars in about 20 infrastructure projects. In addition, less-than-supportive US non-farm payrolls data encouraged market participants to believe that the Fed would opt for QE3 sooner.
Without doubt, the ECB decision and Chinese investment proposals are a shot in the arm for the markets; but it is unclear if the market prices have over-extended themselves. The FOMC meeting scheduled for September 12 will of course be watched rather closely for any significant policy announcement. At the same time, it is also true that the US macro data have not really deteriorated to an extent that would make QE3 an automatic choice.
Despite fervent expectations, QE3 is still a 50:50 chance. Market participants are speculating on the outcome and have built long positions in many commodities including gold. In some way, QE3 has been priced-in already. The fundamentals of some commodities especially in the base metals complex are not supportive of a major price rally. If the chance event of QE3 does not materialise, correction must follow. An important additional factor that is a drag is the slowing Chinese economy as evidenced by recent manufacturing data. A lot of caution is, therefore, necessary in taking positions in the market.
Gold
Prices have extended their gains over the past week with the yellow metal benefiting from rising hopes of further quantitative easing. In London on Friday, the gold PM Fix was at $ 1728/oz, up from $701/oz the previous day.
Short-term and long-term investor interest in gold has gained momentum with Comex tactical positions at their highest since March, driven in part by short-covering but mostly due to fresh longs being established, an expert pointed out. Physically-backed gold ETF holdings are at record high levels of over 2,500 tonnes.
While frenzied speculative interest is palpable, the physical market continues to be rather weak, especially in two of world’s largest consuming markets India and China. In India, falling rural incomes due to poor monsoon and record high local market prices driven by a weak rupee have resulted in notable slowdown in consumption demand. If anything, scrap selling has increased.
Going by gold’s track record this year, the metal continues to be vulnerable to disappointments on the financial market side. In the event, there would be rapid price correction. The current price rally hinging almost entirely on a chance event of a policy action runs a clear downside price risk.
Also, there are not many takers for the Thomson Reuters GFMS gold price forecast of $1800/oz before year-end on the back of an investor-led price rally, and to trade above $2000/oz in the first half of 2013 before commencing a secular decline. In any case, the forecast prices, even if reached, may not sustain. At the same time, given the present positioning to the long side and rising appetite for physically backed ETPs, if further policy easing and liquidity increase materialise, gold may well extend its recent gains.
Silver
Silver has surely outperformed gold and benefited from the latter’s rally, but continues to be vulnerable because of weak fundamentals. Holdings in physically backed silver ETPs have surpassed 15,000 tonnes for the first time since May 2011. In London, on Friday the AM Fix was $32.22/oz; but prices went well past $33 in New York.
According to technical analysts, there is reason to be bullish on silver and can look for a move toward 35.10 area. This is helping a bullish view on gold too where a weekly close above 1,700 would raise the target to 1,765 and then the 1,790 area. The medium term outlook is bullish.
Base metals
With global industrial activity slow and Chinese manufacturing activity continuing to surprise many to the downside, the market has to prepare for a prolonged period of sluggishness. This also makes some policy interventions more likely than not, something like further loosening of monetary policy or stimulus. In the event, some metals such as copper are sure to benefit. China will continue to stay as the focus of market attention.
According to technical analysts, for copper a break above 7,825 suggests a strong bounce toward 8,610 initially. Likewise, the move above 2000 in aluminium signals further upside scope toward 2060/2100. The medium term outlook is neutral.
Crude
The market balances are turning constructive. However, for a major rally during the rest of the year, fresh triggers are not visible at this point in time. The possibility of a release from reserves is a possibility.