Commodities | Apr 22 2009
By Rudi Filapek-Vandyck
Many a resources analyst has been shaking his head in the face of continuously higher prices for the likes of copper, zinc and crude oil since early March. ANZ Head of Commodity Research, Mark Pervan was one of them. But, states Pervan this week, commodities, and base metals in particular, are never a one-way bet. A price correction had become overdue and for all we know that correction might well have started on Monday.
Pervan suggests the market has become highly news sensitive in its short term direction. What will be the catalyst that will make this downward move stick? Pervan thinks it will be a stronger US dollar, but he adds it could in essence be anything, anything that can be interpreted as a bad omen for commodities demand.
That’s how it goes when markets become overheated. They seek a reason to subsequently let-off steam.
Pervan does point out the very high cancelled LME copper and aluminium warrant positions (which is material flagged that has yet to leave LME warehouses) points to further declines in LME stocks in the near term. This, he suggests, could potentially limit the price falls in this correction.
He has no such limitations in mind when it comes to crude oil. Let’s face it, says Pervan, crude oil has risen on the same improvement in investor optimism that has pulled equities higher for six weeks in a row. From a fundamental perspective, however, the oil market looks really, really ugly. Despite the official rhetoric, OPEC members are not good in complying with production cuts, and non-OPEC members seem all too eager to fill any gaps in the market.
A seasonal slowdown in oil demand should only further add to the headwinds building. Pervan believes US crude supplies will climb higher off already near record high levels “putting further downward pressure on prices”.
Alas, for those investors hoping fundamental analysts such as Pervan might be too pessimistic, technical analysts at Barclays Capital reported on Tuesday the technical picture for base metals and crude oil in particular has been severely damaged by Monday’s sell-off. Until Monday the chartists were confident crude oil was simply building a base on its way to US$58 per barrel, and higher. Post Monday the chartists are talking about the “formation of a double-top” and thus investors are advised to sell into any rallies.
“Bounces should be seen as an opportunity to go short”, has become the new credo. Barclays Chartists believe crude oil (WTI) is heading back for US$42 per barrel.
As the overall outlook for resources has rapidly reversed, the same might hold true for gold. The precious metal had become the main victim of the overall spike in risk appetite since early March. Chartists had already started talking about US$730/oz, but on Monday gold jumped higher as about everything else went down.
Said US-based market trader and publisher of his own daily newsletter, Dennis Gartman: “Fear for the banking system trumped any and all other economic concerns. Gold once again became the repository of all fears.”
But where Gartman still doubts whether gold can rally much further in the face of renewed investor concerns, ANZ’s Mark Pervan has no such doubts. Gold simply looks cheap, says Pervan, the metal is simply waiting for another round of risk aversion to move to higher price levels again. Contrary to Gartman, Pervan believes a stronger USD won’t hold back gold as both are likely to benefit as perceived safe havens in uncertain times.
Throw in rising physical gold buying ahead of one of India’s major gold festivals, Akshaya Tritiya (celebrated on April 27), and gold prices should rise in the coming weeks, says Pervan.
Technical chartists at Barclays side with Gartman. They too believe further upside for gold is likely to remain limited. Unless, of course, global risk appetite soars to new highs and the price of gold is quickly pushed through technical resistance at US$900/904/oz. That, say the chartists, is not a prerequisite but the absolute minimum for gold to potentially resume its previous bull trend.
Gartman has a different approach: “Was [US]$863-$865 a double bottom for gold? Do double bottoms ever really hold? Only time shall tell, but history shows us that double bottoms rarely hold; they almost always give way.”