In the near term, commodity markets are expected to show significant movement wherein the bullion counters are expected to maintain its green trend owing to safe haven buying by the global traders.
Global commodity markets witnessed volatility last week, during which CME gold futures hit a fresh six-year high of $1454.40 per troy ounce and silver rallied to 13-year high of $16.63 per troy ounce. Silver is outperforming gold after breaking a key resistance of $15.00 on CME, which has resulted in fall in gold/silver ratio to below 86 from an all-time high of 93.45 in June.
A global economic slowdown and an International Monetary Fund (IMF) report that US Dollar was overpriced by 6-12 percent weighed on the equity and currency markets, pushing gold and silver prices to multi-year highs.
Trade wars and political tension in Middle East have strengthened the global bullion market. US President Donald Trump on August 1 announced an additional 10% tariff on $300 billion worth of Chinese imports starting September 1. The announcement came a day after talks between the two countries failed to ease trade tensions.
The rise in the price of gold and silver is leading to building up of long positions on CME, as reported by the Commodity Futures Trading Commission (CFTC). Apart from US FOMC, the European Central Bank has also hinted at monetary easing and a rate cut. Slowing down of the global economy is attracting gold as safe asset.
On the energy front, the global crude oil market is being influenced by economic conditions as well as rising tensions in the Middle East. In spite of the rise in prices, fear of a global slowdown along with rising monthly US oil production is putting a lid on the upside movement. OPEC and Russia’s decision to extend production-cut agreement to March 2020 has had a limited impact.
On the inventory side, US crude oil stores have been falling, indicating more crude oil feed by refineries due to ongoing summer driving season. But at the same time, stocks building up for finished product—gasoline and distillates—weighed on the prices.
Goldman Sachs has lowered its year-on-year oil demand forecast for 2019 to 1.265 million barrels per day from 1.45 million barrels per day at the beginning of the year. Separately, easing of production in the Gulf of Mexico after Hurricane Barry also had a bearing on the market. Oil producers began restoring the output, nearly 74 percent of which was shut down due to the hurricane.
Metals market traded on a mixed note after China’s industrial production and fixed asset investment growth rose on a monthly basis, but the gains were capped by the slower GDP growth of the world’s largest metal consumer.
Though the individual fundamentals for metals such as zinc and nickel are lending short-term support to the prices but on broader terms, most of the base metals are likely to witness profit booking due to gloomy economic outlook. Nickel outperformed in the entire metal segment, surging due to growing open interest in the Shanghai market that shot up by more than 50 percent since the beginning of July.
Separately, metals used in electric vehicles and stainless steel production could see a supply shortfall in long term, as Indonesia is planning to bring back from 2022 the ban on nickel ore exports.
According to ILZSG, zinc market was in deficit by 123,000 tons in the first five months of the year and lead mine production for the period reached 1.94 million tons, up from 1.91 million tons for the same period in 2018. According to IAI, global primary aluminium output fell to 5.246 million tonnes in June from revised 5.406 million tonnes in May.
As per ICSG, global world refined copper market showed a 96,000 tonnes deficit in April, compared with a 42,000 tonnes deficit in March. For the first four months of 2019, the market was in a 155,000 tonnes deficit compared with a 64,000 tonnes deficit during the same period in 2018. Thus, drawing the inference of a gloomy economic outlook, as predicted by the IMF and other rating agencies in view of slowing down of GDP, labour market will put a lid on global metals market.
In the near term, commodity markets are expected to show significant movement, wherein the bullion counters are expected to maintain its green trend owing to safe haven buying by traders. Energy counters are expected to witness a range-bound movement owning to uncertainty in Middle East and trade negotiations between the US and China. Also, the weakening global demand outlook will weigh down crude oil prices and base metals. The metals will be looking at Chinese demand and trade dispute settlement to take further cues for the directional movement.
(The author is CEO, Commodities and Currencies, at Karvy Comtrade Ltd.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.