Global commodity markets seem to be going through a churn currently for a variety of reasons including waning investor interest (more pronounced in gold and silver) as evidenced by a considerable reduction in the speculative froth; relative underperformance of commodities as equities rebound; a firmer dollar weighing on prices; and supply side looking comfortable even as the demand growth looks lacklustre.
An important reason may be that markets have already begun to factor-in a gradual scale back of the US Fed quantitative easing. This follows gradual decline in unemployment levels. Also, and critically, there are serious concerns about the risks of a larger balance sheet. While the timing may be a subject of debate, there is no doubt that tapering of asset purchase could begin to happen sooner than many may imagine.
It is in the nature of markets to react today to anticipated developments tomorrow. An additional factor is the Asian giant China, arguably the mover and shaker of the world commodity markets. Chinese data need to be watched closely for any signs of downward risks to growth.
So, overall, while the US economy – the engine of global growth – seems to be looking up, concerns over Europe and to a lesser extent over China persist. Comfortable supplies, muted demand growth and waning investor interest is a potent combination currently buffeting commodity markets in general. What will trigger a change remains to be seen.
Last week, however, was positive for the metals complex. All precious metals were up week-on-week with palladium outperforming (a rise of 2.1 per cent) to end the week at $744 an ounce in London, while gold, silver and platinum price rose marginally (0.3-0.8 per cent). With the exception of tin, all base metals were up with lead leading the charge (+6.8 per cent) followed by aluminium (+4.0 per cent). Going forward, most markets are expected to trade in a range.
Agricultural commodities – corn, wheat, oilseeds, cotton, sugar – have also faced downward price pressure following an anticipated rebound in production in the Northern Hemisphere.
Gold
In the tug of war between ETP outflows and physical demand, the yellow metal is seen coming out as a loser as outflows have slowed but so has the physical demand.
Net redemption from ETPs has crossed 450 tonnes this year and in May alone it was an estimated 110 tonnes.
An additional 100 tonnes physical ETP holdings are cash negative, it is estimated. Obviously the pressure is likely to continue, exacerbated by the anticipated strength of the dollar.
Of course, one cannot ignore the alternative scenario. If macro data were to worsen and equities begin to come under pressure, the yellow metal may again attract investors and recover its safe haven status. But this scenario playing out has low probability on current reckoning.
In London on Friday, the gold PM Fix was $1,395/oz, down from the previous day’s $1,414/oz.
Silver followed suit with Friday AM Fix of $22.57/oz versus previous day’s $22.68/oz. Platinum ended the week at $1,459/oz and palladium $744/oz.
The World Gold Council has projected a record import into India in the second quarter (350-400 tonnes) in addition to 215 tonnes in Q1, and full-year imports at 865-965 tonnes. While the basis of these forecasts is unclear, doubts linger about the forecast numbers even as some see it as a hype to support falling prices. Meanwhile, the Government of India has threatened to take more stringent steps to curb gold import and consumption. A weakening rupee partially neutralises the benefit of fall in dollar price of gold. End of marriage season and beginning of agriculture season during June-September period will reduce physical demand.
Technically, gold is seen facing resistance at $1,455 and then $1,420 while support is seen at $1,375 and $1,355. Further weakness in silver can be expected as the market is in a clear surplus and investor fatigue seems to have set in. A close below $22.00 would open up $20.15 and then $19.60 area.
Base metals
Last week, LME copper, nickel and zinc remained largely unchanged. Lead prices have risen close to 10 per cent from mid-May lows and the rise is attributable to a 17, 000 tonne global refined lead market deficit in Q1, as estimated by the International Lead and Zinc Study Group. Exchange stocks have declined too. Chinese demand is triggered by battery and E-bike production.
On LME Friday, aluminium closed at $1,878/t, copper $7,281/t and nickel $14,752/t. According to technical analysis, copper momentum is bearish. Resistance will be faced at $7,535 and then at $7,380 while support is seen at $7,200 and $7,100. In nickel, a break below $14,600 would confirm a bearish view toward $13,450 next. Sellers near 2215 are expected to cap lead.
Crude
The fundamental picture is somewhat mixed. Trigger for an upward traction has faded. So, Brent continues to hover around the relatively weak levels just above $100 a barrel.
As growth signal gathers momentum and demand picks up, one can expect the price situation to improve.