Gold and silver collapse; base metals battered
Last week was one more extraordinary week that witnessed humungous sell-off in the global commodity markets in a condition of panic. Crude, base metals, precious metals and agriculture almost everything was swept away by a strong wave of negative sentiment. In what was described as exaggerated sentiment, crude prices fell, while across the complex prices of base metals plunged as broad weakness in macro data drove fears of a global slowdown.
Precious metals were not spared either. All precious prices declined week-on-week with silver showing sharp correction. Risk aversion amid macro fears have weighed on prices. The industrially biased precious metals suffered the most. Agriculture was not spared either. Downbeat macroeconomic outlook took a toll on market sentiment as prices tumbled.
Pessimistic comments and the Fed's twist did not help. The US dollar strengthened. The next few days are going to be extremely volatile. The market is torn between poor sentiment but constructive fundamentals in many commodities. Extreme caution is necessary in trading global commodities as there is reason to believe some more pain is left. It may not be a time to short the market though.
How long the dollar's strength will last is the big question everyone is seeking answers to. How can the greenback remain strong in the face serious twin-deficits of the US? The dollar is not performing miracles, but euro is behaving rather poorly because of the unresolved sovereign debt crisis that threatens to blow up.
There is a worldwide crisis of confidence. So, again, caution is the watchword. No one really knows where the global commodity markets are headed. There's too much of speculation and less of informed opinion. As and when the weak sentiment undergoes a change, commodities with strong fundamentals are most likely to bounce back.
Gold: In a week of major sell-off amid panic caused by lack of confidence over the global economic growth, gold shaved off 5.9 per cent on the week. On Friday, in London, the PM Fix was at $1,689 an ounce, down 1.9 per cent from the previous day's $1,722/oz.
Silver that usually rides on gold's coattails collapsed dramatically on Friday losing as much as 13.1 per cent. The AM Fix was at $ 32.90/oz, down from Thursday's $ 37.85/oz. Week-on-week the metal was down by a whopping 17.7 per cent. With the market in surplus, silver fundamentals as is well known by now have never been supportive of high prices.
Experts assert that despite the recent sharp corrections, gold is poised to rise higher sooner than many can imagine. Current low international prices are spurring physical demand especially from Asia, but a considerably weaker rupee makes prices of imported gold so much less attractive.
Base metals: Over the week, the entire complex witnessed precipitous price fall with all except aluminium registering double-digit declines. Lead (17.1 per cent), copper (15.3 per cent) and nickel (15 per centwere the worst performers. A weak macro picture continues to swamp the complex.
From the fundamental perspective, the copper market still presents a compelling investment proposition as the market is in deficit. Even with some demand destruction, it will stay in deficit. However, despite the price collapsing to a recent low of a little over $7,300 a tonne, it may still be left with some downside risk as the current price is still above the industry's marginal cost.
On the other hand, aluminium and zinc prices are already said to be at levels below the marginal cost of production; and these two markets are quite close to balance. So, demand is likely to propel prices higher.
Crude: Prices fell in the midst of what has been described as exaggerated sentiments as well as technical triggers, though the movement may not be fundamentally justified. Brent is now as low as $104 a barrel. Demand conditions are not bad really. China's August data show robust imports.
- Umesh Shanmugam