Mumbai, May 31 With sentiment improving due to flow of positive macroeconomic data and slow but sure return of risk appetite among investors, commodity markets overall are beginning to benefit. Investment funds are increasingly flowing into this asset class. In the US futures markets, in particular, hedge fund exposure to commodities has increased sharply in recent weeks, primarily on the long side, signalling the market expectation of a price rise. It is reported that many institutional investors, sovereign wealth funds and asset managers are going overweight on commodities. With signs of revival of global economy following a series of policy measures and stimulus packages implemented by many countries, demand is seen picking up and inventory overhang easing considerably. Freight market has been improving too. Large movement of iron-ore and coal is reported. Interestingly, freight rates have stood out for price appreciation. Average cost of capsize vessels was up 50 per cent for the week to $67,729 a day. However, it is not as if the price of every commodity is trending up on merits. A rising tide lifts all boats. In many cases, fundamentals are turning more and more constructive. Crude is a good example. Tightening of the supply side offers a strong supportive dynamic. On the other hand, in a few cases, especially some base metals, prices have actually moved ahead of what the fundamentals would justify. So, sooner rather than later, fundamentals should catch and the market should see some correction. Look at agricultural commodities. Grains and soft commodities seem to enjoy a good upside price potential as their demand dynamics are less leveraged to global growth prospects. Supply side factors such as weather and falling inventory are also supportive. So, investors have to exercise caution in their commodity exposure because of the differing fundamentals and varying price outlook. As risk appetite returns, investors have to pick and choose from among a host of options. Gold Prices climbed to their highest point since February as the US dollar continues to weaken against the euro. The yellow metal has now reverted to tracking the currency movements. It is a clear change from the behaviour earlier in the year when the inverse relationship between the dollar and gold had weakened, and safe haven buying had driven prices higher. In the London market, on Friday last, gold PM Fix was at $975.50 an ounce, up 1.9 per cent from the previous days $957.75/oz. Silver performed even better, gaining 4.3 per cent on Friday with AM Fix at $15.52 as compared with $14.88/oz the previous day. While prices have found support from a weaker dollar, there is risk the currency support could fade. In the event, a correction would be inevitable and a new catalyst will be required to push prices higher. However, the downside risk seems limited primarily because of emergence of jewellery demand on dips below $900/oz if experience is any guide. While short term corrections are possible, in the medium term, a weakening dollar and build up of inflationary environment are sure to encourage a return of investor interest which in turn will allow prices to gain upward traction. Base metals On Friday, the US GDP estimates for the first quarter of 2009 were revised higher, the US dollar weakened and positive data were reported for Japan and India. No wonder, base metals traded higher on continued flow of macroeconomic data combined with a weaker dollar. For the week, copper traded up 4.7 per cent, zinc was up 3.3 per cent and nickel was up 9.0 per cent. Aluminium was flat over the week. According to reports, Platts assessment of iron ore prices climbed 2 per cent to $66.25 a tonne cost insurance and freight. However, with OECD demand continuing to stay weak and signs that Chinese base metals import demand may wane over the coming months, prices are likely to come under pressure. Additionally, the northern Hemisphere is readying for summer which may witness a quieter period for demand. Some base metals look more vulnerable than others. According to experts, aluminium and nickel stand out as having the biggest downside risk given the potential for restarted production in China and huge inventory overhang. There is a possibility that aluminium will hit a fresh cycle low in the months ahead, while nickel is likely to erase recent gains. On the other hand, copper, zinc and lead are likely to find support at lower levels given the more bullish medium term outlook for demand, relative lower stock levels and less potential for a big ramp up in Chinese production. For copper, the price uptrend may have faltered, but until there is solid evidence of weakening Chinese demand, firm prices are indicated. Given the fundamentals, copper is likely to find good buying support at $4,000-4,200/t levels, while buying may emerge at around $ 1,100-1,200/t for zinc. Crude Buoyed by positive macroeconomic data releases, prices have remained above $ 65 a barrel, reaching new highs for the year so far. Front-month WTI prices have pushed above $ 65 a barrel as positive sentiment and risk appetite are at play. Admittedly, demand continues to remain mixed. While the OECD demand including the US stays weak, Asias emerging markets are bucking the trend. However, it is not demand or supply but inventory changes that are causing a decisive turn. After increasing over the last several months, total inventories in the US have become less burdensome. Peak of the inventory overhang is now past. Data showed a 5.4 million barrels drop in crude oil stocks and significant pick up in refinery activity. In the short-term, prices may be expected to consolidate around the current levels; but the momentum in prices is broadly higher. In any case, global oil balances are turning constructive. Tightening fundamentals indicate amove above $ 70 a barrel in the coming months.

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