Commodities witnessed a steep fall in last few trading sessions led by oil and copper. US dollar was extremely volatile as it strengthened against majors in a pullback movement after touching its lowest this year against a basket of major currencies. The Federal Reserve Open Market Committee (FOMC) in a two-day meeting said the economic activity had picked up after the severe downturn. The US central bank kept key US interest rates unchanged, and said it would do so for a longer period. The precious metal complex lost ground as dollar rebounded from 1-year low against the euro.

SPDR gold trust, the world’s largest exchange-traded fund backed by bullion, wilted 0.7% to 1,094.107 metric tons on September 24. Physical demand has slightly picked up in India due to festive season but dealers are now waiting for the prices to correct more after the steep fall witnessed on Thursday,24th.

There are doubts in the market about the pace of the economic recovery after the fall in US existing home sales and FED?s announcement that it will continue with the stimulus packages as the jobless rate are still at 25-year high.

FED’s dovish statement on inflation have posed downside risks on gold price as we all know that the current rally in gold was mainly due to expectation of premature inflationary worries. Near term weak physical demand for gold coupled with a rapidly increasing speculative position on COMEX as reported by CFTC data can give rise to a steep price correction in the yellow metal.

Technically, strong support is seen at 988-973-964$ on COMEX division of New York Mercantile exchange. Strong resistance is at 1002-1011-1024$.We expect gold to continue its downfall in the near term and can test 973$.On MCX until Rs.15960 holds on the upside, market can test Rs.15290 in October contract. Decline in crude oil accelerated looking at the higher weekly inventory figures of EIA mainly due to weak imports.

Product inventories also surged with gasoline leading, possibly due to the end of driving season. Refinery runs have to decline substantially so as to bring inventory to a more reasonable level. The build in inventories reflects the situation of the economy where demand for refined products is very weak. The recession has run down the demand in U.S and other major consuming country taking crude oil off from record high. The preliminary data suggests that that the global oil consumption has declined in the second quarter of 2009 compared to the same period last year. Though the markets were supportive of positive economic optimism, the current price level reflects the real picture signaling that few positive data cannot pull back the recession hit economies at a faster pace.

The real recovery in crude oil can only be seen if there is a change in fundamentals of demand-supply. The build in oil and product inventories coupled with the strength in the dollar will pressurize crude oil prices on the downside. On charts crude oil has given a definitive downside breakout below 66.70$ on NYMEX. The next downside target is seen at 63.50$ which comes to around Rs.3050 on MCX.

Rallies should be used for creating short positions. Copper, the ?king? of base metals, plunged to its one month low as demand worries mounted in the face of weak U.S housing data and continuously rising LME inventories. Sales of previously owned homes in the United States unexpectedly fell for the first time in four months in August.

Market sentiments also got a hit from the news that the major central banks will began to scale back some emergency lending facilities as financial markets stabilize. Rising LME stock piles have continued to worry investors, suggesting demand for the red metal is still weak.

Chinese imports which were the main trigger in coppers recent rally has also come to a stand still. As per a data Chinese refined copper imports fell by a quarter in August, from July. It was the second month in a row that the top copper consumer had to cut back on purchases, after record imports in the first half inflated inventories.

We expect the imports to fall further in the coming months. The recent rally in copper was mainly due to the dollars weakness as investors used stronger currencies to buy the cheapening dollar-denominated metal. Fall in Chinese imports coupled with a rising dollar will add more downside pressure on copper prices.

?(The writer is head of commodities, Motilal Oswal Financial Services Ltd)