Gold still vulnerable; copper price surge looks imminent .

Mumbai, March 28 Despite leading indicators signalling steady improvement in global growth prospect, broader market concerns continue to weigh down most commodity markets.

Concerns over sovereign risks in the euro area refuse to die down, although late last week the euro strengthened following statement about a possible agreement for emergency lending to Greece. For most part last week, the dollar showed strong rebound, while flow of macroeconomic data from the US was mixed. No wonder, it is only in exceptional cases that commodity prices are rising rather than falling.

It is well known, China has been playing a dominant role in global demand recovery, especially in oil and base metals. So, anything that happens in China is keenly watched for its impact. China's monetary policy tightening is of course a major uncertainty for the sentiment towards commodity sector. One cannot wish these factors away.

There is also good news amid uncertain conditions. There are indications that the European stainless steel sector is ramping up production. Asian majors have been the dominant force in stainless steel production and consumption. If Europe joins its Asian peers with rising production and improving end-user demand, it will have implication for the steel market.

Meanwhile, iron ore continued its strong upward price momentum, with reports suggesting a $10/tonne increase to $153 for 62 per cent Fe material delivered to China.

As for grain markets, the mood is cautious. With growers in the northern hemisphere getting ready to plant, together with weather outlook the Prospective Plantings report to be issued in the next few days will provide direction to price movement.

Gold: After days of range trading, precious metals prices recouped their losses and made gains on Friday as the euro strengthened against the dollar following statement about a possible agreement for emergency lending to crisis-hit Greece, involving IMF together with bilateral loans at market rates.

In London, spot gold Friday PM Fix was at $1,095.50 an ounce, recovering from $1,093/oz the previous day. Silver too gained with Friday AM Fix at $16.85/oz, up from $16.79/oz the previous day. Although the euro has gained some reprieve, there are huge uncertainties about how Greece will be bailed out which makes euro vulnerable beyond the current relief rally, largely perceived to be short-term. Foreign exchange strategists do not perceive the latest proposal as a turning point for the euro. If the euro were to weaken, gold will come under pressure.

On the other hand, investment demand for gold continues to hold firm, with SPDR, the largest physically backed gold ETP, recording some inflows. Total holdings stand at 1,124 tonnes.

However, physical demand stays weak. High and volatile prices continue to discourage the jewellery sector and household consumers. Limited de-hedging prospects are not supportive either. Gold bulls are betting on purchases by central banks, but such expectation is ephemeral. Under extant conditions, gold is likely to remain under pressure. In the short-term, it can go down to around $1,075/oz while in the upper region it can probe $1,150/oz depending on currency fluctuations.

Base metals: A stronger euro and hopeful signs of a helping hand to Greece saw base metals prices increase on Friday. While nickel rose by 3.3 per cent, zinc fell because of a rise in Shanghai inventories which have touched a new record of over 244,000 tonnes, three times the level a year ago.

There is now growing evidence that the base metals complex is beginning to gear itself for a big recovery in demand with leading indicators especially for OECD area signalling positive changes. Latest data for aluminium, copper, nickel, zinc and lead show global consumption growing at a double-digit pace while other data such as inventory trends, physical premiums and semis production/steel production are supportive, albeit to varying degrees across base metals, commented an analyst.

Specifically, according to International Copper Study Group report, there was an apparent surplus of copper in 2009. But more important is the observation that copper mine supply did not grow at all year-on-year in the fourth quarter of 2009. Since 2005, copper mine supply has grown by only 1.3 per cent a year, despite high prices. In other words, mine supplies have not responded to high prices. In addition, the outlook for mine supply growth in 2010 and 2011 is seen limited.

When read with rising global demand for this base metal, limited mine supply growth will mean copper will move into a small deficit of about 100,000 tonnes this year and a much bigger deficit (over 500,000 tonnes) in 2011. The price implication of such a situation can well be imagined. In first half of 2008, copper recorded the highest price of $8,800 a tonne. Will it revisit the level? Going long on copper would make sense.

Crude: Despite weakness in Europe, global oil demand is rising at a healthy clip. Asia's contribution to demand growth is noteworthy, with Chinese demand growing ahead of projections.

With flow of positive data and gradually tightening market balances, prices have broken above $80 a barrel. The trading range has now moved higher. The floor for prices which was $70 earlier has now higher moved to $75 a barrel. The market is said to be on track to transition to $80-90 level in the coming weeks.

It is not as of there are no concerns; but oil market fundamentals are not among them. European debt is a worry.

Source : Business Line