Technical Analysis

Major commodities are correcting again

Ravindra V. Rao | Updated on March 12, 2018 Published on July 07, 2012

Commodities started the week on a positive note with COMEX gold moving above the psychological level of $1,600 an ounce and economically sensitive commodities registering decent gains after a fall in the previous quarter.

But in the later part of the week major commodities were seen correcting again eroding their second successive weekly gain after weak macroeconomic data’s from US triggered worries about the health of the world’s largest economy.

Most commodities started to fall on Thursday after the Chinese, European and Britain's bank all loosened monetary policy with PBOC and ECB cutting the benchmark rates and BOE extending a bond-buying scheme. Those measures sparked worry among many investors that the global economy was deteriorating belying hopes of quicker economic growth.

The selling intensified on Friday after US data showed non-farm payrolls expanded by only 80,000 jobs in June, weaker than forecast and the third straight month that fewer than 100,000 jobs were created. The unemployment rate remained at 8.2 per cent. The ICE Dollar index rose by more than 2 per cent on weekly basis against the basket of currencies. Appreciation in the US dollar is bad for commodity prices because they are mostly priced in dollars. For example, if the value of the dollar rises by 5 per cent, the price of commodities drop by 5 per cent assuming everything in the world economy remains the same.

Consumption of commodities will fall taking the demand for raw materials lower and if supply remains the same then prices tend to drop.

COMEX Gold August contract fell more than 2.50 per cent in the last two days of the week after rate cuts by Chinese and European banks and disappointing US jobs report fanned deflationary fears, forcing investors to move to the safe haven US dollar selling gold and other risky assets.

A $3 drop in crude oil also took bullion lower as the status of gold as a hedge against inflation faded. The major factor behind the gold’s recent up move was the hopes for further stimulus by Federal Reserve and other major economies as the yellow metal has been sensitive to central banks’ monetary policies. But now investors are losing conviction that there will be another economic stimulus causing a lot of short-term gold investors to sell. There was little support for gold from the physical market, where bullion demand remained subdued after prices rose above $1,600 earlier this week but in India, one of the world's leading consumers, the demand improved on Friday after prices eased, tracking a drop in the world market, though a weak rupee limited the fall.

Economically sensitive commodities also dropped on Friday with COMEX copper registering a fall of almost 2.50 per cent and WTI Crude oil erased all the gains ending the week 0.6 per cent lower.

Crude was pushed higher at the start of the week mainly due to rising tensions over Iran’s disputed nuclear program and an oil-workers strike in Norway. But the dismal US jobs report and an agreement between Norway’s oil industry and labor unions to restart negotiations on Saturday halted the rally and pushed oil prices lower by 3 per cent on Friday.

Commodities will continue to be impacted by geopolitical issues and macroeconomic data from the major developing economies.

(The author is Associate Vice President -Commodity Research Motilal Oswal Commodities. The views are personal)

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