Commodities recover, prices may correct again

After last week, when commodities took a huge hit, they seem to have recovered the past few days. However, some market experts are claiming that there will probably be another price correction in the commodity sector but the underlying tone remains bullish.

11 May, 2011, 07.06AM IST,ET Bureau
The Economic Times

MUMBAI: After last week's bloodbath, commodities including silver, oil and gold have rebounded. However, two out of the three market experts ET spoke to, expect prices to trade in a range over the next few months. Some believe that the underlying tone remains bullish because of a build up in long positions or bets that prices would rise. Last week, silver futures on Comex division of Nymex fell 27% and crude shed some 20% after investors used the killing of Osama bin Laden, ECB maintaining status quo on interest rates, and CME group rasing margins to trade on silver as excuses to book profits in bullion and energy that had run up to record levels over the past few months.

The contracts traded on local commodity bourse MCX fell in line with those traded on global markets as investors unwound bets prices would rise or saw brokers liquidate their positions to protect their margins. However, prices of these commodities started recovering on Monday with a build of long positions, indicating a pullback rally was under way. On Tuesday at 4:20 pm local time, open interest (OI) -- a measure of money flowing into the market as investors take buy or sell positions -- was up in crude and silver from close on Monday, while that in copper and gold trailed Monday's OI by a small margin before trading in international commodities was set to begin at 5 pm.

Indian commexes operate from 10 am-11:30 pm. Harish Galipelli, head (commodities & currencies) of JRG Wealth Management , felt that energy and bullion would try and have a shy at last week' s highs but unless they broke out of the tops made last week and sustained above those levels prices would correct again and move in a range thereafter. "I see consolidation in precious metals and energy while monetary tightening and high stock levels in China would be a negative for copper." JRG expects the most active gold futures contract on MCX to trade within a range of Rs 21,000-22,800 per 10 gm, silver Rs 45,000-65,000 a kg, copper Rs 380-440 a kg and crude Rs 4,250-5,000 a barrel over the next few months.

At the time of going to press, gold was up 2% from last Thursday' s close at Rs 22,168, silver by 6% at Rs 58,560, crude traded down two-fifths of a percent at Rs 4,559 and copper was up by 1.2% at Rs 406.8. Thursday's price levels have been used since crude and silver fell sharply on that day. "My guess is that bullion and energy would consolidate over the next few months," said Viral Shah, senior vice president of Geojit Comtrade .

"An event to watch out for would be the end of the quantitative easing by the US in June. If there is a further round of easing, the party would continue, but if the US raises rates and there's no QE, I think commodities, especially precious metals, would correct." However, Suresh Nair, director of Admisi Commodities' is more optimistic. "Monday witnessed a recovery in prices along with a build up in longs. I feel that the underlying trend is bullish and we could well see some commodities trying to make new tops," he said.

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