The Hindu Business Line : Commodity market ignores N. Korea's nuke test

Trends Gold edges upward in the London market to rule close to $580 an ounce. Experts see scope for dollar weakness in the months ahead, which should gold.

Mumbai , Oct. 10

Is it likely that markets are becoming increasingly immune to minor geopolitical developments? Strong fundamentals and a voracious appetite for growth seem to override negative developments, which under normal conditions impact markets in some way or the other.

North Korea's nuclear test failed to shake markets — both equity and commodity. Normally, in times like this, the equity market declines and the commodity market rises. But the impact on Monday was transient and unremarkable on both the markets.

Defying logic

For a commodity that takes immediate cognizance of adverse developments such as a nuclear test, gold defied normal logic and held on admirably. The yellow metal did edge upward in the London market to rule close to $580 an ounce. But the provocation was a combination of rising crude prices and geopolitics.

How long will gold continue to remain under downward pressure? In the short run, prices are more likely to trade largely sideways, consolidating at recent low levels on the back of a combination of dollar strength and crude oil price weakness. In the medium term, the picture could change though.

Experts see scope for dollar weakness in the months ahead, which should benefit the precious metal. There is expectation that the dollar will gain support from Fed's tightening cycle that might restart sometime early next year. But it could be short-lived, while macroeconomic conditions would continue to develop favourably for gold.

Weak fundamentals

Meanwhile, market participants have to live with weak fundamentals while factors other than macroeconomic might turn more bearish, leaving scope for further losses in the absence of resumed investor interest, an expert said.

He added that strong decline in global hedge-book in the first half of the year would mean a deceleration in pace of de-hedging. In other words, the potential of an important buying force could fade in the second half of this year.

CFTC data for the week ending October 3 showed another cut in net fund length on Comex gold with speculative positions falling. Net fund length in gold is currently 70 per cent of the levels seen in early September.

Base metals

Supply side concerns and demand side prospects currently engage the global base metals market participants. The market is indeed concerned about labour action, strikes and declining inventories.

On the other hand, order levels from semi-fabricators in most metals markets suggest very strong underlying demand, an expert commented.

Prospects of copper prices are positive, as production losses and imminent surge in Chinese demand could find sellers caught short.

Positive demand from stainless steel sector and low level of LME stocks mean nickel has a strong upside. Lead too looks set for a price rise after recent gains.

Crude oil

A fragile recovery in energy prices is underway. There is a marked reduction in the overhang of speculative length in oil over the past seven weeks. No wonder, selling pressure is dissipating.

Fundamentals are sure to tighten with the run-up to peak winter demand over the coming months. Price recovery could thus gain momentum, especially if OPEC is able to convince the market that it is serious about planned production cuts.

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