Commodities retreated last week as the greenback bounced back sharply after hitting a 15 month-low against a basket of six currencies.

After the Dubai crisis, the focus has now shifted to Greece on huge deficit concerns. Even though the risk of Dubai and Greece debt default is small, more of such events will shake investor?s confidence thereby shifting their focus from riskier assets to safe haven investments. On the macroeconomic front Germany witnessed an unexpected drop in industrial production which declined by almost 2% and the manufacturing new orders fell in terms of volumes.

Trade deficit in the UK widened despite faster export growth in October. US jobless data were a bit mixed with initial claims rising moderately whereas continuing claims fell sharply in the previous week. The ICE dollar index for the week rose by almost 1.30% and closed strongly at 76.57. The bounce back in the greenback resulted in a steep fall in gold which fell almost $50 and hit a low of $ 1109 an ounce on the COMEX. On MCX gold contract for February delivery fell below Rs 17000 after reaching an all-time high of Rs 18364.

Physical demand was mixed whereas investment demand dipped with holdings in the SPDR gold trust, the world’s largest exchange-traded fund backed by bullion, fell by almost 1.20 percent to 1116.25 tones on a weekly basis after nearing the all time high in the previous week. US dollar is expected to strengthen further thereby pressurizing gold.

For the week we expect gold to test $1100-1095 an ounce on the COMEX. It will take a strong support at $1090 and should give a pull back from those levels. Crude oil fell for the third consecutive week as the focus shifted from economic recovery to real fundamentals which are bleak. Oil prices ended the week below the psychological level of $70 a barrel indicating more downside in the coming sessions.

Apart from the fall in greenback it was lower demand forecast by the Energy Information Administration (EIA) which pressurized oil prices.

The report stated that World oil consumption in 2010 is expected to be at 85.22 million barrels as compared to last month?s forecast of 85.40 million barrels. Further there were reports that Saudi Arabia has supplied full contracted volumes to Asia which will further result in a dip in the compliance rate.

Oil Prices below $70 and production increase by some members of OPEC has raised hopes of a surprise in the next meeting of the oil cartel scheduled for December 22.The only positive news for crude oil was Chinese trade data which showed a rise in imports in November compared to a year earlier but was well below the previous months level according to preliminary customs data. The focus next week will be on the OPEC monthly report which will give further direction to oil prices. Although fundamentals are pointing towards downside in crude oil, technically we expect a bounce back as prices can test $72.50 a barrel. Strong support on the downside is pegged at $68, a barrel break of which will take the prices down to $66 a barrel.

Among industrial metals Copper saw some profit taking after rallying in the previous week. The slower pace of economic recovery and rebound in dollar from its 16-months low has capped the upward move in copper. Strong import numbers from China on Friday supported copper which bounced back after hitting a low of $3.06 lb on COMEX division of New York Mercantile exchange.

Imports of refined copper and semi-finished copper products rose to 290,158 tonnes in November, after falling 34%last month. In the first 11 months of 2009 imports are almost 67% more than last year at 3.92 million tonne.

On the other hand imports of copper in the U.S dropped by 9.5% in the first ten months of 2009 compared to last year according to a report from the United States International Trade Commission. Similar to oil the focus in copper will slowly and steadily shift to demand-supply fundamentals from optimism over economic recovery putting a cap on prices.

In the week, we expect copper to trade sideways to down as a further rebound in US dollar and rising stockpiles in LME warehouse won?t let copper prices to sustain at higher levels.

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