Gold to trade range-bound; crude oil moving up G Chandrashekhar Kolkata, July 25 After the severe drubbing in the second half of 2008 that extended to early 2009, in the wake of serious slowdown and near-recessionary conditions that forced emergency bailout action by many governments, commodity markets have displayed tremendous resilience, especially in the last three quarters, following signals of substantially improved growth prospects as borne out by the flow of economic data. Recently, however, the relationship between commodity fundamentals and prices have turned uneasy because the market seems to be, once again, gripped by a bout of pessimism spawned by apprehensions over the sustainability of global economic growth. Despite improving fundamentals in many cases, clear price risks to the upside have been capped by growth concerns and waning confidence. Crude, for sure, is one such commodity. Two Apprehensions It is in this strange context of improving demand prospects and waning confidence that one must examine commodity investment in the second half of this year. Currently, investors have two apprehensions. The first is whether the damage wrought by the European credit crisis will have a long-term implication for commodities and the second relates to doubts whether commodities will and/or should continue to find favour with investors as a separate class of asset. In these uncertain times, one can safely expect commodities to diverge with the best prospects held by those with strong emerging market exposure and potential supply constraints. In the event, 3 Cs - crude, copper and corn – stand out as having upside potential. Given uncertainties surrounding global economic growth and incipient inflation concerns, the eternal favourite gold, too, has an upside. Latest Chinese Customs commodity trade data suggest slowdown in certain sectors but import demand continues to rise in many others, including crude, as imports have hit record highs, strongly signalling the possibility of sustained levels of imports in the months to come. Experts see the emerging picture as a controlled slowing in growth moving to a more sustainable, though still robust, level. Gold Paradoxically despite a conducive environment (risk aversion, inflation fears and easy money) for more rallies, gold prices have considerably eased in recent weeks from their record highs in mid-June. The yellow metal has hovered around $1,200 an ounce for quite some time (indeed, mostly below the level in recent days), facing stiff demand resistance and profit taking at higher levels. Given that the second half of the year is more likely to face a slowdown in growth, the question is where will gold be? Clearly, gold's fundamentals – oversupply, slowing demand and physical surplus – do not support a price rise. But investor interest is key to this market. So long as gold is perceived as a currency in addition to being a commodity, the unaddressed risks of European debt and inflationary expectations would force investors to flock to the precious metal. As and when growth signals turn more positive and sustainable, some investors would surely exit the market which is sure to have a price implication. But there is a good chance that then physical demand (mainly fabrication) will step in to provide support. So, going forward, gold may trade in a range for a while until supportive factors emerge. The downside could be $1,175/oz with possibility of price going down to as low as $1150/oz, where it will find support, and upside at about $1230-1250/oz, where it will face resistance and some profit taking. In the near term, the metal may see range trading at $1175-1225. Crude Despite sharply improving market fundamentals driven by rising demand, pessimistic sentiment generated by fears over sovereign debt and slowing economic growth, especially in China, has effectively capped the rise in prices. The OECD (Organisation for Economic Co-operation and Development) demand is clearly improving. Asian demand — China and India — is unabated. Non-OPEC (Organisation of the Petroleum Exporting Countries) supply growth is surely slowing. So, tightening fundamentals are gradually making way for crude to push higher and breach the by-now psychological $80 a barrel. Base metals Given tightening fundamentals, copper and lead are seen offering the potential for the strongest price rebound over the coming months. There are indications that China may have another round of fiscal stimulus to further strengthen infrastructure development. Together with signs of emerging OECD demand, developments in China are expected to have a positive impact on prices in the base metals complex.

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