G. Chandrashekhar

Support from declining inventories

Mumbai , July 2

Following less hawkish than expected Fed comments, commodity prices continued to extend their gains further across the board with crude oil, copper and gold moving higher. In addition, market fundamentals are supportive.

It is obvious, Fed hike and comments have soothed concerns over the impact that the inflation/growth trade-off might have on commodity demand, observed an analyst.

Leads surge

Indeed, copper has led the surge higher. Closing near at $7,300 a tonne on Thursday (up 5.8 per cent), the metal shot up to trade above $7,500 on Friday.

Declining warehouse inventories continue to support the market.

The upward movement is not surprising because the medium-term fundamentals for the base metal are supportive.

While technical analysts have been calling the end of the bull market in copper for some time now, demand-supply situation favours an upside to prices.

The demand side looks positive, while supply uncertainties continue to weigh on the market.

Prime Mover

It is no more the US, but China, with its huge appetite, which is the prime mover of the base metals market.

Those closely watching developments in the Chinese economy assert that demand drivers in the country are only getting stronger (infrastructure and construction sector) and that the copper market there is tight.

The Asian giant is world's largest consumer and has contributed to more than 60 per cent of the growth in demand over the past three years.

The decline in China's imports of copper in the first half of this year means a substantial drawdown of inventory there.

Gold's move

The second half could, therefore, witness a huge demand surge for raw material (in a tight supply situation) with its implication for prices.

More dovish than expected Fed statement and associated dollar weakness (fell by 2 per cent against euro) spurred gold to make significant gains not seen since early June with cash prices moving well above the psychological $600 an ounce to around $614/oz at the close in London on Friday, up from Thursday's late quote at $594/oz in New York.

With lack of strong support on a commodity fundamental basis, gold is likely to continue to be influenced by non-fundamental or external factors.

Conflicting views

Further dollar depreciation and a move back up in inflation expectation are needed for it to sustain its price gain.

Although conflicting views about growth prospects in the second half and interest rates emerge, economic data over the next few weeks will become a decisive factor.

Some economists believe, growth will remain firm in the second half and core inflation will continue to rise, leading the Fed to tighten rates higher.

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