Most metals still in consolidation

In the previous blog article, we wrote that the consolidation in commodity markets is likely to continue. We also argued that it is probably too early for bargain hunting. Our assessment has not changed during last week, despite copper and lead posted a stronger gain on the week.

The large speculators reduced further positions in metals. According to press reports, George Soros has sold almost his entire $800 million stake in gold during the first quarter of this year, which weighed on sentiment at the start of last week. According to the CFTC “Commitment of Traders” report, non-commercials reduced their net long position by 11,766 to 164,603 contracts. Thus, the large speculators cut their net long position by around 25% within one month. In silver, the large speculators reduced the net long position in the week ending May 17, by 6,061 to 17,435 contracts. Thus, they trimmed down the net long position by more than 25% within just one week. Over the last four weeks, the net long position was almost halved. However, in copper the liquidation of net long positions was even more pronounced. Within one month, large speculators diminished the net long position from 25,059 to a mere 7,745 contracts, a decline of almost 70%. As long as large speculators close long positions in commodities, the risk for commodity prices is biased to the down-side and it is too early to go on bargain hunting. The knife is probably still falling and investors should listen to the advice not to catch a falling knife.

Gold ended the week higher thanks to a jump on Friday afternoon (GMT). Two factors led to this price spike. First, investors feared that something unforeseen could happen again over the weekend like the arrest of the IMF governor the week before or the secret meeting of a few finance ministers of the eurozone two weeks ago. Second, Fitch cut the rating of Greece to B+ reacting on the statement from the head of Ecofin, Mr. Junker, and warning that even a maturity extension would be regarded as a default. However, position squaring ahead of a weekend is less likely to lead to a trend reversal as long as the underlying fundamentals do not change.

For the PGMs, the platinum week in London was the main event. The supply/demand forecasts by Johnson Matthey were the main driver. JM predicts an almost balanced market in platinum but a supply deficit for palladium. However, Norilsk voiced that the palladium market would also be balanced. But over the summer month, demand for metals is usually lower and thus, the recovery of the PGMs might also be short-lived.

Two major fundamental factors would have to change to see again a stronger demand from consumers and investors in commodity markets. The US dollar did not strengthen further. But this is not enough for rising commodity prices. The dollar would have to weaken again considerably. The end of QE2 is looming, however, this is not a reason for a stronger dollar. As long as investors expect higher returns in other currencies, the US dollar could weaken further. The ECB is likely to hike rates further towards 2% by the end of this year or early 2012. This would argue for a weaker US dollar, but fears of a Greek default and a possible contagion to other peripheral eurozone countries is currently weighing on the euro.

The second factor is the outlook for the global economy. Investors are currently cautious as some economic data came in weaker than the consensus among economists predicted. Especially surveys among purchasing managers in the service sector and among analysts and fund managers disappointed, while the manufacturing PMIs are still at a very high level and point to strong expansion.  Usually, economists are slow to adjust their forecasts to lower than expected economic data. Thus, it might take some time that economic figures point still to robust growth and also exceed the consensus forecasts. Therefore, bargain hunters might find better buying opportunities over the next couple of weeks.