Will April 2009 go down in recent economic history as a watershed month? Are we seeing an end to the trend in commodity price performance and investment flows? These are questions uppermost in the minds of a large number of market participants.
A slew of data on Eurozone performance released recently have been positive.
Business sentiment has seen a marked improvement this month. Investor sentiment has risen to the highest since the beginning of the credit crisis.
Experts assert that data suggest economic trough may have been reached in first quarter and that the pace of contraction has started to come off.
Interestingly, the markets reacted positively to the data releases. Euro was up by nearly 30 basis points against the dollar post the release last week. The currency has moved from around 1.29 levels earlier last week to around 1.32 levels on Friday. A weakening dollar has the potential to boost commodity prices.
It may well be that green shoots are visible in the Eurozone. But to strike a note of caution, it may be too early to celebrate. There is a belief that genuine recovery still remains at a distance. More policy stimuli may be necessary to boost economic activity. Crude, metals, precious metals and some agricultural commodities have all performed rather well in the first quarter of the year for a host of reasons. In April, however, the price rise in some commodities has been slowing. Many investors still see oil has a long-term value proposition, but there are signs of disappointment with the price performance of gold, for instance, as evidenced by long liquidation and sagging inflows into exchange traded products (ETPs).
A booster dose gold received last week was from China. On Friday, a report from the State Administration of Foreign Exchange that the country has increased its gold reserves by 76 per cent (by 454 tonnes) since 2003 and now has the worlds fifth largest holdings at 1,054 tonnes has proved hugely supportive at a time high prices are leading to compression of physical demand.
To be sure, China has over $1.90 trillion in foreign exchange reserves. It is conceivable, the country to buy some yellow metal from the international market too. So, the coming weeks are likely to be interesting for the commodity markets. Investors are sure to monitor developments closely, especially on the weather front. As we move into May and beyond, agricultural commodity markets will increasingly be weather-driven. Geopolitics seems to be much less of a concern of late. However, dollar movements as also inflation need to be watched.
Gold
For most part of April the yellow metal struggled to break above $900 an ounce with stalled ETP flows and lack of momentum. However, prices managed to recapture the level on Friday following weakening of the dollar and news from China about growing gold reserves boosted the sentiment.
On Friday, the London PM Fix for gold was at $907.50 up 1.1 per cent from the previous days $897.50/oz. Silver too moved in tandem. On Friday, in London AM Fix was $12.78/oz, up from $12.43/oz the previous day. The limelight has now shifted to physical demand. India’s auspicious day (Akshaya Trithiya) and festival season are seen as supportive factors.
However, given the current high prices, unabated food inflation and limited purchasing power for luxury goods, physical demand for gold is likely to be muted.
Speculators are, of course, betting on a continual depreciation of the dollar and an inflationary environment in the coming months. China’s interest in the yellow metal will also be closely watched. Over the medium-term, gold has the potential to rise by up to 10 per cent from the current levels.
On the other hand, investors in ETP are beginning to liquidate their long positions because of the disappointing performance of gold. Whether last Friday’s upward movement will change investor perception is difficult to predict at this point of time. Caution is advised.
It was a mixed week for the base metals complex. Copper gained 3.3 per cent on Friday, but fell by 6.9 per cent for the week even as inventory levels fell by 8.5 per cent.
Base metals
Tin was the only base metal to gain on the week, up four per cent. While nickel fell by 10 per cent, zinc fell by 8.9 per cent and lead by 8.7 per cent week-on-week.
This was not entirely unexpected because the fundamentals of many base metals are weak and do not justify high prices. The recent gains had been overdone and a pullback was inevitable. Chinese buying had surely propped the market up; but now there are emerging concerns about the sustainability of continued Chinese buying. With inventories rising and increasing volumes of production being restarted in China, aluminium looks at risk from further weakness. On the other hand, the downside for copper looks as though it may have moved up to $4,000 a tonne with scrap tightness adding more to cathode demand than the market had perhaps anticipated and a widespread perception that SRB buying may resume around $3,500/t.
Crude
Oil prices have so far this month shown signs of stabilising in the wake of indications that demand was stabilising. Macroeconomic expectations have helped consolidate prices within a higher trading range. A look at global oil balances suggests the scale of supply fall has now outpaced that of demand fall.
However, the presence of a huge inventory overhang and continued bearish inventory dynamics in the US suggests prices might well remain stuck in the current range for a bit longer, before the effects of tightening fundamentals are felt on prices. In the short-term, external factors like equity market movements and macroeconomic news continue to influence the price direction.
There are also oil-specific fundamental factors such as large inventory at play. With the advent of summer season, crude inventories are likely to whittle down as refineries increase runs.
However, until that happens, there is little scope for prices to break the current trading range, assert experts.
