Despite lingering concerns over the US ‘fiscal cliff’, some positive developments on the macroeconomic front last week including decision to release further aid to Greece and upside surprise in the US, China and Euro area manufacturing data helped improve the sentiment in the global commodity markets.

Across commodities, base metals were the strongest performers last week with prices rallying primarily not only because of positive macro news but also some short covering. In particular, aluminium prices rallied by 6.3 per cent on the week boosted by a deepening backwardation curve, as an analyst explained. Not to be left behind, nickel gained 6.2 per cent, while tin and zinc prices went up by 4.8 and 4.5 per cent respectively. Copper and lead prices rose by 2.8 per cent each.

The precious metals complex too performed well except for gold which came under heavy selling pressure to be down by 0.5 per cent over the week and settle at a two-week low. Despite its so-called safe haven status, the yellow metal failed to benefit from the risky asset rally last week. Palladium rallied by 4.2 per cent and silver by 2.6 per cent. The oil market, on the other hand, witnessed sideways trading in the absence of a directional catalyst. Although the market is well-balanced in terms of demand-supply fundamentals, it is buffeted by demand fears because of sovereign debt crisis and supply concerns due to geopolitical instabilities.

As the global commodity markets move towards the end of the year, activity will likely be subdued. However, annual commodity index rebalancing early next year will continue to engage the attention of market participants. This will of course be in addition to developments in the US on the fiscal cliff front. Experts have opined that the US fiscal cliff resolution should be positive for gold as reflation risks will once again move back centre-stage. Additionally, risks of an oil price spike sometime in early 2013 cannot be discounted.

Gold: The metal has been struggling to find upward traction despite favourable macroeconomic backdrop. A huge sell-off last week put prices under pressure. On Friday, in London gold PM Fix was $1,726 an ounce, little changed from the previous day. On the other hand, silver rallied to a Friday AM Fix of $34.28/oz versus the previous day’s $33.76.

Physical demand in India remains modest. Slowdown in sales after Diwali festival is palpable. A weaker rupee continues to push local prices higher. While gold bulls and other interested entities continue to lure buyers and investors with glib talks of further price gains, policymakers are constantly talking about restricting high volumes of gold imports which are seen as a drain on the country’s foreign exchange.

According to technical analysis, the momentum is bearish. Gold will likely face resistance first at 1,736 and then at 1,755, but will have support first at 1,705 and then at 1,670. A move above 34.40 in silver would signal further upside potential toward next higher target near 35 and encourage a bullish view for gold.

Base metals: The complex ended the week higher and continued its upward trend seen since the beginning of November. On LME cash side, aluminium ended the week at $2,094 a tonne and copper at $7,979.

For the base metals to sustain the positive price momentum, it is imperative that there is sustained flow of positive macro data relating to global economic growth as well as a clearer sign that demand fundamentals in China are improving at a pace and manner that results in inventory drawdown.

According to technical analysts, aluminium is entering the seasonally strong period. The move above the initial target of 2,080 signals further upside toward the next target in 2,130 area. Upside target for copper is in the 8,100 area. The medium-term outlook is said to be bearish.

Crude: Technically, the market looks bullish for Brent to move toward range highs near 112 and look for a break above there to signal further upside potential toward 114. For WTI, a move above the 90 range highs would be needed to make a bullish move toward 93 area. The medium-term outlook is said to be neutral.

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