In another week of strong gains for commodities, some metals and agricultural products in the international market hit new highs or posted multi-year highs even as the dollar fell precipitously.
While the currency factor did play a role, clearly in many cases market fundamentals are reasserting themselves. So, the upward price move is not without justification. Crude is a glaring example. Oil demand growth is projected to be second highest in the last 30 years. LME week also brought out near-unanimous views about metals market performance.
In related news, iron ore prices continued their upward march, while coal prices too finished the week strongly.
Iron ore stocks in China already higher than at the start of the year are expected to rise in the coming weeks as several ships are headed there. Ocean freight rates are also reportedly moving up.
From a global macroeconomic perspective, growth concerns are far from dissipated. Governments are fighting to ward off recession. The monetary policy continues to be rather easy and there is strong likelihood of further quantitative easing. At the same time, demand side signals are turning positive, and in some cases supply constraints are felt. This is seen as a sure recipe for a further rise in commodity prices.
So long as growth concerns persist, easy money policy continues and equity market confidence remains fragile, investor demand for gold will continue. Similarly, crude is expected to stay around $80 a barrel given strong demand projections and tightening fundamentals.
Agriculture markets continue to be at the mercy of weather and of course bio fuel policies of governments. Corn and cotton prices stay at elevated levels.
Gold: Continuing the upward march to newer highs, gold and silver prices have been buoyed by weaker dollar and equity market, with investor interest remaining intact. Inflows into physically backed ETPs are significant. Prices briefly breached $1,380/oz on Thursday, while silver reached 30-year highs, having risen by a staggering 9.2 per cent over the week.
In London on Friday, all precious metals gave up some value. Gold PM Fix was at $1,367.40 an ounce, down 0.4 per cent from the previous day, while silver AM Fix was at $24.42/oz, down 0.3 per cent.
Taking the cue from overseas markets, gold prices in the domestic market crossed the psychological barrier of Rs 20,000 for 10 grams. At these unprecedented levels, demand compression is seen setting in. Physical demand for fabrication is rapidly drying up despite high season. It is time, the government stepped in to raise the customs duty on gold imports. This will help generate revenue for the exchequer.
Global prices are poised to rise higher to test $1,400/oz, albeit amidst a bumpy ride, as the market speculates about further quantitative easing and continuing environment of low interest rates in advanced economies. Profit-taking and correction enroute is imminent. However, in India, untamed inflation may force a further tightening of liquidity.
Base Metals: Internationally, lead and zinc were the strongest performers over LME week, rising 6.9 per cent and 5.9 per cent respectively, while nickel fell by 1.5 per cent and aluminium by 1.8 per cent.
The positive sentiment regarding current and future conditions of fundamentals that was generated at the annual LME week in London is palpable. The message was loud and clear – ‘strong demand, slower supply', as an expert put it.
Demand conditions are more robust than economic data would suggest, goes the refrain. Restocking demand is yet to emerge with full vigour. The price implication of this is inescapable.
Copper continues to be the focus of attention given its supply constraints and huge deficit forecast for next year. Additionally, tin faces severe mine supply constraints. Both the base metals have solid price support.
At the same time, leading indicators of July and August point to an imminent slowdown in major OECD and emerging economies which needs close watch. Simply put, there is cautious optimism. Easy money policy and prospect of further quantitative easing are supportive.
Crude: Prices remained above $80 a barrel for the entire week. Demand indications from various sources continue to paint a more positive picture than before. Further upward demand revisions to global oil demand were made by IEA, EIA and OPEC's monthly oil market reports.
IEA report pegged 2010 annual demand growth at 2.15 million barrel a day, the strongest growth in 30 years, second only to 2004. OECD demand recovery is seen strong, while Asian demand remains robust.
Under the circumstances, crude may be expected to hover around $80 a barrel with strong potential for an upside surge.