Pessimism pervades commodity markets

Mumbai, Dec 7 Commodity markets continue to be battered by steady flow of negative reports on global economic growth prospects. World Bank has lowered 2009 global GDP forecast to one per cent. The latest OECD composite leading indicators for October 2008 signal a deepening slowdown across industrialised and emerging countries.

In response to the ongoing macro-economic deterioration, several central banks slashed interest rates.

A slew of stimulus package announced by various countries including Europe has not been of much avail. Market pessimism over the international economic outlook continued to hang over the base metals and oil markets.

There is a sharp contraction in liquidity. Construction activity has slowed and automotive sales are falling.

These are key sectors to use industrial and base metals. The negative sentiment has also affected the energy market, with crude failing to stabilise above $50 a barrel. Worse, NYMEX light sweet crude (January contract) fell to under $44 barrel, influenced by continuing concerns over weakening oil consumption.

Spot gold has been volatile. Under the present uncertain conditions, gold ought to have spiked like never before. But it has failed to decisively break through even low barriers. Weak oil price and market worries about deflation risks are proving negative for the yellow metal. The sentiment is expected to remain weak for some time.

The pricing environment for commodities could get weaker from the current low levels.

Currency market movements - especially dollar/euro relationship - need to be watched closely. In addition to demand side factors, a strong dollar has pushed commodity prices down.

There is of course one section of investors who begin to perceive value at the current price levels, but are still wary of making sizeable investments. It is important that there is an overall change in sentiment. How long it would take for the various stimulus packages to exert their influence is hard to tell.

Unless the macroeconomic scene shows signs of changing direction towards recovery, commodity prices could continue to be under intense pressure for several months ahead.

Gold

Although there was a rebound in gold physical demand in the third quarter encouraged by consumer-friendly prices, it is unlikely to sustain over the coming weeks. It is also highly likely that the dollar would continue to remain strong relative to the euro during the next few months.

This is sure to cap the upside for the yellow metal. Investor interest too may be waning. Speculative positions in Comex gold have more than halved from the record levels reached earlier this year. On the other hand, physical holding in exchange traded products remain elevated, having set a fresh all-time high in November at 1,142 tonnes.

In other words, as a safe haven asset, investors have chosen to retain their exposure to gold as a physical asset rather than maintain paper exposure, even though inflationary concerns have eased, commented an expert.

With the rupee staying around 50 to a US dollar, gold prices have once again gone out of reach for many consumers. There sure is a demand compression at the present elevated price levels. From the present, the upside seems to be rather limited.

Base metals

Slowing demand and rising inventories are truly hurting the complex. Fears of deeper and prolonged recession around the world impact market sentiment.

All the markets are in surplus. A slew of measures including output cuts have not helped so far. Analysts are cutting their price forecasts for the first and second quarter of 2009.

Extreme caution is required in trading base metals as the downside risk to prices has not disappeared.

Crude

The downtrend in crude has continued during the past week with prices hitting newer lows to trade at their lowest levels since early 2005.

The market has not shown any sign of stabilisation. Steady flow of weak economic data is interpreted as the beginning of deeper and longer recessionary conditions.

Demand side is on top of market concerns. However, supply uncertainties have not gone away.

There is the distinct possibility of OPEC announcing further output cuts, over and above the two million barrels a day since November. Experts are continually downgrading their price outlook for crude. The mood in the market is sombre and extreme caution is recommended.