http://www.thehindubusinessline.com/2010/02/22/stories/2010022250180700.htm

Mumbai, Feb. 21

You may or may not believe that the Chinese New Year of the Tiger is usually associated with volatility; but commodity markets seem to have decided to bear the assertion out. Look at how the year has begun. Commodity prices — crude, base metals, precious metals — have all rebounded.

Oil prices have been propelled higher because of the flow of positive macroeconomic data that has raised the prospect of economic recovery. Most base metals prices have rebounded by about a fifth.

Demand for stainless steel is recovering rapidly and there are reports of associated surge in nickel and ferrochrome demand. Asian coal demand is surging.

As for agricultural commodities, the Food and Agriculture Organisation has calculated that the global food price index has risen from 151 points in June 2009 to 172 points in January 2010, driven by higher prices of oils and fats, dairy products and particularly sugar.

Is the commodity price rise sustainable? While data expectations remain positive, the surprise move by the Fed to raise its emergency lending rate on Friday is of course being viewed negatively and is pressuring prices, for instance that of crude. However, for base metals, the market fundamentals are evolving in a constructive manner.

Gold: Two important factors came into reckoning last week. First was the news that the IMF intended to sell the balance of its gold earmarked for disposal in the open market weighed upon gold prices; and second, the Fed's decision to raise the discount rate to 75 bp. These two pressured gold prices.

In London on Friday, the PM Fix was at $1,112.75 an ounce, down from previous day's $1,118/oz. Silver bucked the trend with Friday AM Fix at $15.95 versus the previous day's $ 15.83/oz. As for ETP holdings, gold holdings have risen marginally to 1,746.1 tonnes, reducing the outflows for the month to 2.4 tonnes. However, silver holdings have grown by 193 tonnes over the month to set a record of 12,511 tonnes.

In the short-term, the gold market is likely to be impacted and price direction set by investor interest and appetite, in addition of course to the external or broader market conditions.

Without doubt, physical demand has suffered because of high and volatile prices during the whole of last year, except that central bank purchases prevented a collapse.

Whether physical demand will recover is the multi-million dollar question.

However, monetary tightening and cost of funds will have a bearing on gold prices. The movements of the dollar need to be watched.

If the wide anticipation that the dollar will appreciate against the euro materialises, the yellow metal could come under heavy pressure as speculators would exit the market.

Base metals: Base metals continue their recent rally. Aluminium rose by 4 per cent week-on-week. Copper, zinc, nickel and lead finished the week 8-12 per cent higher. Inventories are being drawn down.

There is general expectation that global demand conditions are supportive. While the health of the Chinese demand is not under question, the OECD restocking demand may begin to emerge soon. Further price gains in the coming weeks seem a distinct possibility.

Without doubt, the market sentiment was affected by the US Fed's surprise move to hike the discount rate.

It was of course stressed that the move “did not signal any change in the outlook for the economy or for monetary policy.” But belief is gaining ground that the days of easy money may be coming to an end.

Crude: Positive macroeconomic data from the US propelled prices higher; but the gains were stalled when the US Fed raised its emergency lending rates.

Clearly, market fundamentals are turning increasingly constructive for the crude market.

While demand growth is positive and is expected to sustain, supply growth, especially from non-OPEC side is seen rather difficult. This is sure to tighten the market balance.

Over the coming weeks, prices have the potential to trade in the $ 80-85 a barrel range, subject of course to positive data flows and absence of interference by market regulators.