It was again the dollar which remained the subject matter of commodities market. Macroeconomic data mixed with US GDP are signalling that the world?s biggest economy is on a recovery path. US ISM manufacturing index showed a weak reading of 52.6 in September as compared to 52.9 in the previous month. The expectations were for an improvement to 54.
Jobs data released from the US economy also pointed to the negative consequently affecting consumer spending. IMF on Thursday declared that a global economic recovery has begun led by Asia. It upgraded the 2010 growth forecast to 3.1% from
2.5 % projected in its July outlook. It also said the world output will contract by 1.1% in 2009 as compared to an earlier forecast of 1.4 %.
We have witnessed some positive economic data across the globe, but the main worry remains as to how fast the global economy will recover from its worst ever recession. It is the labor market which still remains a matter of concern for the quick recovery. The month of September was the best month for gold so far after it witnessed all time highs on COMEX in the month of March last year. We saw gold trading consistently above the $1000 mark on COMEX division of New York Mercantile Exchange. But as we said in our earlier article that near term weak physical demand coupled with IMF gold sales and a rapidly increasing speculative position on COMEX, as reported by CFTC data have posed downside risks on gold prices. Last week CFTC again reported a build in speculative positions in gold but the rise was lesser as compared to previous figures.
This indicates that going ahead we may see a contraction in the speculative positions. We expect that in the short run, gold is still vulnerable to a correction. Technically, we believe that before testing new highs gold will move southwards as we expect a rebound in dollar index towards 78-78.50 levels. Strong resistance in gold is seen at $1010 and support is pegged at $984-973.Break of $1010 will take the prices to $1026 and on break of $ 984 prices will test our previous weeks target of $973.Crude oil futures in the week recovered from its previous weeks low and traded higher on back of fall in dollar index. Further the rebound came due to surprising weekly stockpiles of gasoline which decreased by 1.6 million barrels as against the expectation of a 1 million barrel build.
From last few months we have seen crude oil consolidating in a range of 58-75$ not giving any clear indication as to where it is headed towards. Demand is still weak which is reflected by the build in inventories. It?s only the currency and Chinese imports which have played a major role in crude oil?s impressive rally towards $74.We believe that weak fundamentals will cap crude oil?s gains as there is no major trigger which will support oil prices to sustain at higher levels. So, we remain intact with our view that build in oil and product inventories coupled with the strength in the dollar will pressurize crude oil prices on the downside. The next downside target is at 63.50$ and below there at 60$ on NYMEX. In industrial metals, copper has continued its downward move since past four weeks. The metal was pressurized due to weak demand from major consuming countries especially from china where imports of copper have fallen for the second consecutive month. Though the markets are still well supported with positive recovery hopes, it is the mixed economic data?s, as discussed above and weak demand fundamentals which are pressurizing the red metal prices. Further a report showed copper output in Chile, the world?s biggest producer rose 7.8% in August from a year earlier after state owned Codelco and BHP Billiton Ltd. boosted production. Output rose to 459,823 metric tons from 426,689 tons a year earlier. We are not very optimistic about copper as the weak demand fundamentals coupled with the falling imports of China will have a major impact in the coming sessions. Also if we look at the history last quarter is traditionally not good for copper. On MCX copper prices in 2006 last quarter witnessed a drop of 19.07%, 2007- fall of 15.12%, 2008- big fall of 52.42% due to financial crisis and 2009- down by??… (Already down by 0.16% as of this writing).
(The writer is head of commodities, Motilal Oswal Financial Services Ltd)