The Hindu Business Line : Commodity markets look for fresh leads

Prevailing trends
Overall reduction in net speculative length in precious metals, with most of the liquidation coming in gold
Base metals affected by labour actions, strikes, declining inventories and other supply side issues.
Improved weather has led to weakness in agricultural commodities.

Washington , Aug. 22

Last Friday's CFTC data showed an overall reduction in net speculative length in precious metals, with most of the liquidation coming in gold. Speculative length in silver was also cut mildly and remains at the relatively low level of just 25 per cent of open interest in comparison to gold's much heftier 32 per cent.

Gold on the up

Forex experts see scope for further dollar weakness in the months ahead. Should that materialise, gold will be the beneficiary.

Of course, the restart of Fed's tightening cycle later this year (as widely anticipated) might prompt some dollar strength during the last quarter.

However, such movement is likely to be short-lived. The macroeconomic environment can be expected to continue to develop favourably for gold. What can potentially spoil the party and lend a bearish tinge to the yellow metal?

One has to also track factors other than macroeconomics. De-hedging numbers could be one of them.

De-hedging

Figures published recently showed a strong 5.1 million ounces (Moz) decline in the second quarter global hedge-book this year, adding to the 5.0 Moz fall in the first quarter.

Experts monitoring the market expect the pace of de-hedging to decelerate.

This can lead to an important buying force to fade away in the second half of 2006.

Within platinum group metals, speculative interest in palladium is still relatively low.

At 38 per cent of current open interest in the NYMEX futures contract, net non-commercial length is way below its all-time high of 60 per cent.

It is still a long way below that of platinum where the fund share of open interest is still over 50 per cent.

Base metals

As far as base metals are concerned, supply side issues are at the forefront of market concerns, with labour actions, strikes and declining inventories all serving to highlight a constrained supply side.

The union has voted to strike at the world's largest copper mine - Escondida.

The sentiment towards the copper market will be closely linked to the progress of ongoing negotiations.

CFTC data showed that non-commercials continued to increase their short exposure to Comex copper over the week. Non-commercial net fund position came in on the back of a combination of long liquidation and fresh short positions.

The non-commercial net fund position in Comex copper has now consistently been in negative territory since early April 2006, remarked an analyst.

Nickel is supported by positive demand from the stainless steel sector, the low level of LME inventory and the strike at Voisey's Bay nickel mine, the analyst added.

Agricultural commodities

Among agricultural commodities, the recent weakness across some of the grain and oilseeds markets can be attributed to improved weather conditions (especially in the US) that are supportive for production.

Corn market continues to enjoy a strong upside bias because of strong US demand for ethanol as also Chinese demand.

Cotton's positive price outlook arises from robust Chinese import demand to fuel its burgeoning textile industry needs. Among soft commodities, it is only sugar whose prices have been on a steady decline. Increased production in Brazil, India and Thailand is seen exerting downward pressure on prices. Overall, most commodity markets are for waiting for fresh leads to set a price direction.