Gold was the winner in the global market of widely traded commodities this year and is likely to be stronger than other commodities in 2012.
The yellow metal was a clear winner, given its safe haven status and heightened risk aversion of global market players. As the risk of a European debt crisis continues to loom over the global economy, gold and the US dollar can turn into the investment of choice. Silver is used as a commodity but is also treated as money, competing with fiat currencies. This dual status of the white metal can help it rally in times of crisis and follow gold. Let us look at the individual commodities to see what they look like for the coming year.
Gold: The metal has fallen substantially during the second part of the year, but is the only commodity in our group that is strongly positive for the year. Gold had closed near the $1,450-level in December 2010 and at the time of writing this article, it was trading at the $1,550-level. A panic in the market can send gold rallying again. For now, the charts say the precious metal can go all the way down to $1,450-1,485 before catching a bounce. If gold falls below that, it has a few support levels to clear, which include $1,350, $1,200 and $1,100. At present, the trading range is between $1,450 and $1,950.
Silver: The white metal has a history of following gold and being extremely volatile. Five per cent moves a day are not unheard of. Hence, it’s prudent to be not aggressive when trading in silver. For the year, it posted a negative return. On December 31, 2010, silver closed at the $31.5 range and at the time of writing this, the price was $27.05. The correction in the price was inevitable this year, given its huge rally since early 2010 of about 230 per cent.
The white metal is now near an area of support of $26 and could catch a multi-month correction or even a reversal. If it falls below $26, it could go all the way down to $21, a key level. When silver sold off in the 2008 crash, it fell almost 58 per cent. A similar percentage fall now could take it down to the $21 level. On the other hand, a rally from the $26 level can take silver to $35 and a breakout of that level can push prices up to $45.
Crude: Crude oil is flat for the year, having closed on December 31, 2010, at $99 and is priced around that level at the time of writing this. We are tracking the sweet crude oil futures contract traded on the NYMEX. And, are bearish about its future, as the demand peaked a few years earlier in the US. The slack was picked up by China and India, which are now witnessing a slowdown, putting downward pressure in prices.
Additionally, we have an explosion of supply in natural gas in the US, which could replace crude in the long run. Since markets discount the future, this will be a negative for crude prices. If there is a spike in crude prices, it could be a result or threat of war between the US and Iran. We feel the trading range for crude is between $70 and $120, givings a good playing field for traders.
Copper: Copper is down almost 30 per cent for the year, an ominous signal for the equity markets. These often follow copper with a lag. Unlike copper, the S&P 500 index is flat for the year, raising the prospect of an equity market selloff in 2012 to catch up with the metal.
The copper futures contract, trading at $3.35 at the time of writing this, is a little far from the support zone of $2.84. The zone had been tested twice earlier and could break if prices come down again. A break can take it all the way down to the $1.70-level and a rally can take prices up to $4, a boost to equity markets.
Natural gas: The prices of natural gas continue to fall in the US, as new drilling techniques have created an abundance of supply. We are bearish on the global prices of natural gas, unless a war with Iran pushes up prices of crude and the former rises in sympathy. Given the import barriers in India, its citizens cannot take advantage of the falling prices. Plus, the depreciating rupee skews the picture for Indian buyers.
Trader tip: We'd keep an eye on the dollar. Generally a rise of the US dollar results in a fall in commodity prices. However, if the rise of the greenback is driven by panic, you'll also see gold rise and, perhaps, silver.
The author is based in Chicago and is the editor of www.capturetrends.com