AP: Gold may rise on growth worries, but bumpy ride likely
How fickle markets can get. Choppy conditions have characterised the global commodity markets in recent days. Prices have come under pressure, especially of growth-linked commodities such as crude and base metals, following softer-than-expected macro data from the US and China. Pessimism has seized the market so much that crude dropped $5 a barrel last week to trade below $80 despite strong fundamentals that do not justify the current price.
However agricultural market prices have witnessed price rallies triggered by adverse weather conditions; and the embargo on grain shipments from Russia has served to fuel the frenzy, raising the spectre of record high food prices two years ago.
The amount of investment flowing into the commodity sector has also been rising in recent months. Currently, the market is torn between tightening fundamentals and macro-economic pessimism. At the moment negative sentiment and pessimism about growth seems to have overtaken constructive fundamentals.
How long this sentiment will last would depend on the quality of data flow in weeks ahead. Prices of a number of commodities have potential to rise sharply once pessimism wanes.
Gold: Prices have once again broken above $1,200 an ounce to one month highs. With macroeconomic concerns resurfacing and the US dollar weakening, prices have bounced upwards. Physical demand has naturally dried up at the current elevated levels. However, investor interest is picking up evidenced partially by inflows into physically backed ETPs.
Long term investor interest in gold continues to be strong. The environment is developing favourably for the yellow metal for safe haven buying. With economic uncertainties refusing to fade decisively, rising speculative demand will prop prices higher. But the ride higher will be far from smooth. Expect volatility and occasional correction due to profit booking.
Base metals: After rallying for weeks, the entire complex has come under pressure with concerns over growth resurfacing following slightly disappointing data from the US and China, as well as lack of distinctive positive news from any region of importance. Seasonal slowing in physical demand has also added to the sentiment. So, in the short term, prices are vulnerable to downside risks.
To be sure, the fundamentals are constructive for most base metals. Copper, tin and lead enjoy strong fundamental support. Zinc prices may witness a pullback as the rally may have been overdone.
Crude: With sentiment worsening, prices have dropped well below $80 a barrel; this despite some strong figures emerging from Europe. Oil demand growth projections for 2010 and 2011 have been consistently revised higher. Oil demand is expected to rise to new highs. Asia will continue to drive demand growth. Yet, local US data continue to be used as proxy for global conditions, observed an expert. Any sign of the current pessimistic sentiment waning would send prices soaring higher.
