Commodity prices on the boil again

US Fed’s indication of more stimulus supports base metals, euro zone crisis drives precious metals to all-time highs.

Commodity prices shot up today, following news supporting a rise from across the world. While the US Federal Reserve hinted at another stimulus package to pull the country’s economy out of a possible slowdown, European leaders are scheduled to hold an emergency meeting to discuss the region's financial crisis.

Consequently, gold set a new record at $1,578.5 an oz in London on indications of a deepening euro zone debt crisis. The precious metal in sterling rose to an all-time high of 987.11 pounds an ounce, up 0.5 per cent on the day and set for an eighth daily rise.

Gold prices also hit a record high in Mumbai’s Zaveri Bazar to settle at Rs 22,750 per 10g today, thereby pulling the physical business almost to a standstill. The metal gained Rs 295 from the previous day’s close of Rs 22,455 per 10g.
  

Silver followed suit and closed with a gain of Rs 1,850 at Rs 54,850 a kg. This was the largest single day gain for silver in recent memory.

European leaders will meet this Friday to discuss the region’s economic crisis, after acknowledging for the first time that Greece may need to default on its bond obligations to solve its debt problems. This has raised fears in the market, keeping the euro at a four-month low against the dollar.

The fear worsened with ratings agency Moody's downgrading Ireland’s credit rating to junk status on Tuesday. Moody's has also said Greece would need a second bailout. Euro zone politicians are also shifting focus to Italy which, if it required assistance, would overwhelm the euro zone's existing rescue funds. Supporting the worsening global economic sentiment, the Federal Reserve hinted that some members were pondering the possible need for additional easing.

“Base metals are firming up because of indications of more financial easing by the US Federal Reserve. Another stimulus package means more money in the hands of investors. This means people will have more buying capacity,” said Gnanasekar Thiagarajan, Director, Commtrendz Research.

Ireland is facing considerable challenges in regaining its economic sovereignty and it cannot take for granted that it will get a cut in the cost of its European emergency loans, finance minister Michael Noonan has warned. This indicates the economy of the region is worsening, said Thiagarajan.

Meanwhile, supportive growth numbers from China also helped commodities to rise. Copper imports in China, the world's leading copper and aluminium consumer, snapped a two-month decline and recorded a rise of 9.9 per cent to 280,009 tonnes in June. China's implied oil demand in June rose 1.1 per cent from a year earlier. “Supportive growth numbers from China eased the jitters about demand and overshadowed concerns over the European sovereign debt issue. The Chinese economy continued to grow at a rapid pace. It grew 9.5 per cent in the second quarter of the year even after continued monetary tightening efforts from China. All these are positive indications for metal prices,” said Basant Vaid, Senior Research Analyst, Bonanza Portfolio Ltd, a commodity broking firm.

“Now, it will be interesting to watch if the Federal Reserve resorts to further quantitative easing in the times to come. If that happens, we expect the prices of all dollar-denominated commodities to surge in the coming days.”

Copper rose around 8 per cent in the last two weeks underpinned by worker strikes at some of the world's top copper mines. Although Chile's Codelco returned to work on Tuesday after a 24-hour strike, the protest highlighted challenges facing the world's top copper miner as it struggles to lift stagnant output. But, workers will return to work at Freeport-McMoRan Copper & Gold's Indonesia mine, following an eight-day strike after the company agreed to start talks over pay on July 20.