Global financial markets have faced the brunt of the economic slowdown and the IMF expects global growth to contract by ? to 1% in 2009. Industrial activity has been affected and demand for industrial metals has been hit badly. The year 2008 was very volatile as the first-half witnessed a gain in commodity prices followed by a slump in the second-half. However, commodities have started 2009 on an upbeat note as expectations of the impact of stimulus packages have provided support. Prices have also risen on the back of technically driven rallies and short-covering. The impact of production cutbacks on prices has not been witnessed as yet as the demand situation is grim. But by the end of this year we could see a recovery in prices as demand could slightly improve and the already taken production cutbacks will show their impact.

Amid all this global financial turmoil, gold has performed phenomenally as it is the most traditional form of investment and considered as a safe-haven asset. Base metal prices have also gained on the back of short-covering rallies and anticipation of buying activity due to re-weighting of some commodity indices, during the first half of January. Therefore, the reason for the rise in base metal prices in 2009 has nothing to do with the improvement in fundamentals. Hence, we feel that the gains that were made in the short-term may be given back as fast as they were achieved. Though there are indications of a pick-up in demand from China for re-stocking, the overall improvement may not happen soon and we expect a revival and recovery in prices in 2HCY2009. This recovery in prices could be fuelled by a pick up in demand from Asia, especially China, as the country implements its $586-billion stimulus package that is aimed at infrastructure development. On the other hand, the supply side will also play a major role in pushing prices higher as cutbacks have been widespread, fast and large in scale. Markets have not yet responded to the impact of cutbacks but could feel the effects in full swing by 2HCY2009. The extensive production cuts could help boost sentiments and push prices higher.

Developed economies are expected to face a deep recession in 2009 – IMF World Output is expected to contract around -1.0% to -0.5% for 2009 and improvement is expected to come in 2010 with world output likely to grow between 1.5-2.5%. Japan is expected to witness the sharpest decline in growth as the country’s output is expected to contract 5.8%. However, a ray of hope comes in 2010 as expectations are that the country’s growth could decline only by 0.2%. Growth in the US, the world’s largest economy, is expected to decline 2.6% in 2009 against a growth of 1.1% in 2008. Recovery in the US is also expected in 2010 with growth expectations around 0.2%. Only emerging economies will witness growth in 2009, though at a slow pace between 1.5% – 2.5%. World growth expectations indicate that the real recovery could happen only in 2010 and hence we feel that commodity prices could consolidate this year but prices could rise in 2010 on account of recovery in demand.

With uncertainty expected to prevail until the end of this year, gold as a commodity may witness a rollercoaster rise even further. Investors have flocked to gold – the safe haven asset as risk aversion towards other asset classes increased dramatically. With confidence in the financial markets plummeting to record lows, flows into gold ETFs broke all records in 2009 with holdings of the world’s largest ETF, SPDR Gold Trust rising to a record 1,103.29 tonne by end of March 19, 2009. The fundamental factors that are likely to determine gold prices in the coming weeks are primarily (1) the physical investment demand from investors and ETFs (2) the dollar direction (3) rupee fluctuations and (4) the general trend in the global equities markets. Our view is that the interest in gold shall continue to remain high until we witness a revival in the global economic scenario which continues to be in a state of turmoil. Gold prices on the MCX in the short term are expected to have strong support at Rs 14,800 and are likely to face resistance at Rs 16,000. Spot Gold has crucial support at $900 levels whereas major resistance is seen at $990 levels.

Crude oil, the lifeline of global business activities, witnessed remarkable volatility over the past year, hitting a high of $147.27 in July 2008 and a recent low of $33.17 in December 08. Since then, crude prices have bounced back in line with gains in the global equity markets. Even though Opec has not changed its production targets, Opec is trying very hard to adhere to its earlier supply cut decision. As per the latest data, Opec has implemented up to 80% of its desired production cuts. Weakness in the dollar against major currencies is also supporting oil prices. Despite all of this, factors like the weakening global economy and falling demand in major oil consuming nations can certainly cap the upside in oil prices. Volatility in oil prices has increased in the past few weeks and it is expected to continue in the short term. On the MCX, crude oil prices have a strong support at Rs 2,160 and sustained trading above Rs 2,740 can lead to a rise up to Rs 3,050 in the short term. Nymex Crude has crucial support at $42, whereas major resistance is seen at $60 levels.

Apart from gold and crude oil, base metals have also been in the limelight, as despite of weak fundamentals, the complex has managed to gain this year. Copper, the leader of the base metals pack, has found support above $3,500 on the LME, as prices have gained on the back of short-covering rallies and technical buying. However, we feel that in 1HCY2009, copper prices may face pressure on the downside as LME inventories are rising. The base metals market is right now in an oversupply phase and LME inventories have touched a 15-year high. This factor will prevent the upside in prices. Though copper inventories gained in the last three weeks, we feel that Chinese demand may not be as concrete as even China faces the brunt of the global economic slowdown. The World Bank has cut China’s GDP forecast to 6.5% this year and this is a major concern for the base metals market as markets hoped that Chinese consumption could cushion the prices. China’s GDP grew at 9% last year and 11.9% in 2007. Hence, the current World Bank forecast indicates a decline of 45% in the rate of growth for China’s GDP in the past two years. Hence, the economic scenario still remains bleak and we maintain a bearish view on copper for the short term. But, prices could rise in the near term on the back of short-covering and technical buying. Other than that, the short-term fundamental situation is still weak and gain in prices may not be sustainable and could face selling pressure. Real recovery in prices is expected by the end of this year as a revival in demand on the back of implementation of stimulus packages could provide support to prices. In the short term, copper prices on the MCX are expected to find support at Rs 175 but face resistance around Rs 220. LME Copper has major support around $3000 levels, whereas resistance is seen at $4500 levels.

Overall, we hold the view that commodities shall continue to remain in the limelight despite the spectacular fall witnessed last year, as global equities markets continue to struggle. Crude and base metals could have a quiet time but gold could outshine every other asset class in 2009.

The author ishead, Angel Commodities