The Hindu Business Line : Upside seen for metals, energy on slew of factors

Market happenings
Host of bullish and bearish factors at work.
Scope for dollar weakness in the months ahead & in turn this could benefit gold.
Supply side issues at the forefront of metals market concerns.

Washington , Aug. 15

With commodity prices showing a hefty fall last week and early this week, opinion that it may be time to begin buying is gaining ground.

Tactical investors have raised their net long position in energy and precious metals markets.

Precious metals

Precious metals have remained under pressure as a firm dollar and easing oil prices weigh on investor sentiment. Geo-political concerns, too, have eased a little.

However, a host of bullish and bearish factors are at work.

The Fed may remain on hold at the September 20 FOMC meeting.

This means there is scope for dollar weakness in the months ahead, which in turn should benefit gold.

There is strong expectation that the tightening cycle would restart later this year, which might prompt some dollar strength during the last quarter of 2006.

This may, however, be short-lived. The macro-economic environment is likely to continue to develop favourably for the yellow metal.

Nonetheless, factors other than macroeconomic might turn bearish in the months ahead.

In particular, recent published figures show a strong 5.1-million ounces (oz) decline in the Q2 global hedge book, in addition to the 5.0 million oz fall in Q1.

If the pace of de-hedging decelerates, the potential for an important buying force may fade away in the second half of 2006, commented an analyst.

The latest CFTC data showed speculative long positions in the Comex gold market rising. New longs have been established. Although the net fund length is somewhat lower than the highs reached towards end of last year and early this year, there is scope for long liquidation, should investor sentiment turn bearish.

Base metals

As for base metals, supply side issues are at the forefront of market concerns. Labour action, strikes and declining inventories have all combined to highlight a constrained supply side, while demand shows no sign of abating.

Reports of the union having voted to strike at the world's largest copper mine — Escondida — means that ongoing negotiations there will be monitored closely by market participants. Clearly, the sentiment towards the metal in the market is linked to developments at Escondida.

Nickel is supported by positive demand from the stainless steel sector, the low level of LME stocks and a strike threat at a mine. Perceptions are also strengthening on lead market fundamentals and there is still upside price potential following the recent gains, remarked an analyst.

Oil prices have no doubt fallen back from their recent highs with the lull in hostilities. But fundamentals continue to be supportive of prices in the mid-to-low $70s. In the short-term, the downside looks rather limited.

Perceptions relating to geopolitics can change and create an upside. Weather also can potentially play a part as the hurricane season is yet to peak.

Overall, the market compels a close watch. Unfolding events can dramatically alter perceptions.

More Stories on : Commodity Exchanges | Gold & Silver | Petroleum | Metals

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