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Metals plunge on new worries in China, EU

Traders get jitters on China declining to stimulate growth, EU ignoring Spain?s need for more help and other uncertainties

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Both base metals and bullion plunged today, amid concern at the by the governments of the of the European Union and China.

While silver hit a six-week low, other metals recorded up to a two per cent dip in early evening trade in London, on news of hedge funds going short on metals. Concerns about the lack of progress on a Spanish bailout dampened risk appetite, helping send commodity markets lower and lending support to the dollar.

Copper fell 1.7 per cent, followed by other base metals. Gold and silver plunged to $1,713.7 and 31.74 an oz, their lowest since September 7.

SHARP DECLINE
No progress on a Spanish bailout sent commodity markets lower, supporting the dollar
  Oct 19, 12 Oct 22, 12 % Change
LME ($/tonne)
Tin 21,730.00 20,955.00 -3.57
Aluminium 1,976.50 1,932.50 -2.23
Lead 2,134.50 2,093.50 -1.92
Copper 8,121.00 7,983.50 -1.69
Nickel 17,005.00 16,730.00 -1.62
Zinc 1,864.00 1,847.00 -0.91
Precious Metals ($/Oz)
Silver 32.08 32.25 0.53
Gold 1,721.75 1,726.70 0.29
Brent Crude ($/Bbl)
  111.17 111.43 0.23
Data Compiled by BS Research Bureau
Source: Bloomberg

Apparently, the announcement of a third round of quantitative easing on September 12 by the United States also failed to boost global sentiment, resulting in prices of base metals and bullion moving in a very close range since then. Demand for gold as a hedge against inflation weakened after the Chinese central bank official also warned that new stimulus measures in were unlikely in the near term. Also, the International Monetary Fund forecast the 17-nation Euro area’s economy to contract 0.4 per cent this year.

“Gold prices are treading water, trying to recover from the selloff last week. Looking forward, the markets’ focus remains accentuated on the coming Fed policy meeting this week, where the apex body will gauge the economic scenario and likely throw light on future growth prospects,” said Amar Ambani, head of research, India Infoline.

Gold dived as its inversely proportional competitor, the dollar, rose. The latter found support as a safe haven from the disappointing corporate earnings reports, US data and the latest European Union summit. It then found added support, pressurising gold further, as heads of the 17-nation Euro zone agreed on Friday to continue their pursuit of a single banking supervisor.

China’s economic growth has slowed to its weakest pace in a little over three years. Gross domestic product growth in the third quarter slid to 7.4 per cent from a year earlier. China’s population of 1.34 billion people consumes 42 per cent of the world’s copper, estimates Barclays Plc. Meanwhile, French President Francois Hollande said additional help for Spain wasn’t discussed at the summit of European leaders in Brussels. There’s no certainty Greece will remain a member of the Euro zone.

Meanwhile, hedge funds cut bullish commodity bets to the lowest since July, due to the lack of efforts to keep metals demand afloat by both developed and developing countries. According to US Commodity Futures Trading Commission data, speculators reduced net long position across 18 US futures and options by 4.4 per cent to 1.18 million contracts in the week ended October 16, the lowest since July 24. Gold bets slid seven per cent, the first decline since August 14, and those in silver fell 5.8 per cent, the first drop in 12 weeks.

Copper prices edged down amidst uncertain demand in China, which is unlikely to improve before the end of the year. But losses are likely to be capped by recent data suggesting China’s economy is stabilising and a recovery in the United States is slowly gaining traction. Also, a dollar rally is weighing on its prices. The anticipated tepid recovery was also underlined by China’s foreign direct investment data, which showed inflows falling 3.8 per cent in the first nine months from a year ago.

“Both base metals and bullion prices are expected to remain sideways to bearish, as gains in the dollar will likely reduce the safe haven appeal of the metal and, thereby, increase investors’ attraction towards the greenback. Prices will closely follow region development and dollar moves as well for their further direction,” said Deepa Shakdwipee, senior research analyst with Aditya Birla Money.

In a similar view, a report by said prices might further come under pressure, tracking choppiness in the dollar and equities. Further weighing down prices are weak fundamentals of most metals, it said, tracking recent jumps in stocks at both the London Metal Exchange and Shanghai warehouses, coupled with expectations of a surplus in the physical market for most.

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