Weak Fundamentals and Gains in Dollar May Weigh On Commodities Prices
July 7, 2009

The US greenback remained range bound in last few weeks against the world’s major currencies. The benchmark dollar index has shown narrow range movement between 79 and 81 (on closing basis) in last few trading sessions. The commodities prices also track the dollar movement because they are denominated in dollar. Since the recovery process of global economies may slow down in coming quarters, the dollars` safe haven demand may spur the benchmark index, same time it may invite the fall in the commodities prices because in general the first is inversely proportional to the later.

Worldwide geopolitical issues are incessantly tempering the currency market and making the same very volatile. The talks for the alternatives currency for the reserves, poor economic data of United States and Euro zone, tension in North East Asia (North Korea nuisance), Nigerian crude oil pipeline blasts and upcoming G-8 meeting are the few international issues, those affecting the currency as well as commodity market.

The talks of an alternative for the USD as reserve currency has accounted significantly in market volatility for last few months. First it was raised by the China and Russia and later India also joined to boost up the talks for other options but the talks only may not serve the purpose. Chinese leader already expressed the reluctance over the discussion in G-8 meeting, which is going to be held on July 8-10, 2009 but even mere few words will be enough to add volatility in the market. The talks of imposing restriction on commodity price speculators by Commodity Futures Trading Commission (CFTC) may add further pressure on the commodity market especially energy group commodities and agricultural commodities.

Recently commodity market was very volatile and took cues from the currency market all over the world but energy group commodities like crude oil, natural gas, heating oil and gasoline were tracking the weak fundamentals viz. rising inventories and slowing demand all over the world especially in developed nations. The Nigerian crude oil pipeline blast by MEND (The Movement for the Emancipation of the Niger Delta) and tension within the Iran has also provided boost for sudden price hike in crude oil.

Gold movement remained purely based on dollar movement but silver fell significantly on weak industrial and jewelry demand. Gold traded in a wide range of $910/oz -$945/oz in last few trading sessions. Base metals including copper, zinc, aluminum etc. also traded in narrow range. Copper inventories already started rising in LME (London Mercantile Exchange) and Shanghai. China, the largest consumer of the metal, has piled copper stock to the maximum levels (about 325,000 metric tons) and it is assumed that there will not be any immediate buying in coming quarters. Agricultural commodities like soybean, coffee bean etc. remained weak on exchanges worldwide due to weak demand.

Therefore we are expecting that weakening of demand and poor balance sheets of the countries will hamper the recovery process which will boost the safe haven demand of the king dollar. Dollar index is likely to rise to 85 levels, gold may test $890/oz levels and later may rebound to $1005levels (due to safe haven demand), silver may touch $12/oz. levels, crude may range between $55-$62/bbl and copper may fall to $2/lb in the coming half of this year .

For comments and feedback please write to madan@safetradeadvisors.com .