Since significant price changes lead the economic trends, are softer commodity prices suggesting a weak economy ahead? “There are concerns about the global economy, so the demand for metals will go down. Money is chasing safer assets like gold. The US and Europe are anyway in trouble and China is a new concern. China is in the grip of a bear market. The growth agents of the world are appearing to be fatigued. It will take more time to solve this problem,” said Jagannadham Thunuguntla, equity head, SMC Capitals Ltd.

1. Are weak commodity prices foretelling something?
May 27, 2010 07:08 PM
Prices of metals and crude have been on a freefall while gold is running higher. This may
not be what the bulls wanted to see
Over the past two weeks, all eyes have been focused on the declining equity markets all over the
world. But equally battered have been commodities like metals and crude oil. While the
International Monetary Fund (IMF) and the European Union’s $1-trillion rescue package to bail
out European nations sparked fears of inflation, this is not reflected at all in commodity prices.
The fear of lower demand is overwhelming every other factor.
High grade copper has dipped 14% since the start of this month—from $35.9 to $30.9/lb while
three-month lead has slipped to $1,792 a tonne from the $2,100 levels from February 2010.
Aluminium is down from $1.04 per pound (as on 26 April 2010) to $0.80 per pound on 25 May
2010. On the LME, primary three-month nickel has dipped to $21,625 per tonne from $25,500 in
March. Crude oil has dipped 20% from $88.36 from 3 May 2010 to $70.73 per barrel as on 26
May 2010.
Since significant price changes lead the economic trends, are softer commodity prices suggesting
a weak economy ahead? “There are concerns about the global economy, so the demand for
metals will go down. Money is chasing safer assets like gold. The US and Europe are anyway in
trouble and China is a new concern. China is in the grip of a bear market. The growth agents of
the world are appearing to be fatigued. It will take more time to solve this problem,” said
Jagannadham Thunuguntla, equity head, SMC Capitals Ltd.

2. “Until the uncertainty in the euro persists, commodity prices will continue to be volatile. We
have still not seen a recovery in US markets. Demand and prices of base metals may go down,”
said Atul Shah, head-commodities, Emkay Global Financial Services.
Non-precious metals’ trading value dipped 26% at Rs9,59,404 crore this year from Rs12,91,761
crore in 2009 on the Multi-Commodity Exchange (MCX) index.
“On the base metal front, we may see 5%-10% downside in the next quarter. Base metals may
only see some stability if there are some positive cues from the eurozone. Crude may dip to $62
to $60 (a barrel),” said Pragnesh Jain, research analyst, Anand Rathi.
China’s dip in industrial production growth at 17.8% in April 2010, which was lower than what
analysts expected, indicates a lower demand for base metals. Naturally, gold is emerging as a
safe heaven for wary investors. The yellow metal rose to an all-time high of Rs18,629 per 10
gram in the Indian markets on 26th May.
According to a report published by the World Gold Council (WGC), India and China will
continue to grow, driven by jewellery demand, in spite of high local currency gold prices. In Q1
2010, India was the strongest performing market as total consumer demand surged 698% to
193.5 tonnes. In China, demand proved resilient, rising 11% in Q1 2010 to 105.2 tonnes.
“Concerns over Greece’s public finances and debt contagion fears in Europe have led to strong
buying, particularly for gold coins, bars and gold exchange-traded funds (ETFs) during May,
which may show up in the Q2 2010 figures. While momentum in ETF tonnage paused during Q1
2010, gold ETF flows started to rise strongly again in April and May as investors sought less
volatile investments to protect their funds against economic turmoil. On 20th May, SPDR Gold
Shares (GLD) held a record 1,200 tonnes, with a value of $46.88 billion,” stated the WGC
report.

3. "Commodities were a bull-market phenomenon and the new normal is going to be a lower range
of pricing,” said Tim Schuler, investment strategist with The Permal Group, the hedge fund arm
of large US investment manager Legg Mason. Speaking at the Legg Mason Investment
Symposium in Sydney, Permal said, “Commodity prices will not see the heights of the pre-crisis
years again.”
But not all commodities will see a fall in prices. Gold will remain high, said Mr Schuler. “Gold
does not behave like other commodities in the market. Gold is a store of value.” Permal is a $20-
billion multi-manager of hedge funds and has been around for more than 30 years.
The question is, does a combination of strong gold prices and weak commodity prices mean that
business recovery is really weak and inflation expectations are high? That would be a recipe for
stalled growth.