Commodities fall on global economic blues; analysts predict more volatility

Standard gold fell 3 per cent in Mumbai today as a sharp decline in global commodity prices reduced the metal’s appeal as a safe-haven investment.

Also, copper and aluminium fell 4.75 per cent and 4.24 per cent, respectively, in early London trade, as the dollar surged on concerns over fiscal health of debt-laden euro zone countries such as Greece, Portugal and Spain.

Commodity prices have fallen sharply since the beginning of the current year due to global economic fears over, among other things, the US economy. Copper and zinc have fallen 16 per cent and 22 per cent, respectively, as their major consumer industry, the construction sector, faces withdrawal of incentives from banks, implying recovery in interest rates.
 

HEADING SOUTH Commodity prices (in $/tonne)
	Jan-4	Feb-5	Chg (%)
Aluminium	2,225	1,975	-11.26
Copper	7,464	6,250	-16.26
Zinc	2,575	1,998	-22.41
Lead	2,451	1,938	-20.95
Nickel	18,855	17,172	-8.93
Gold ($/oz)	1,121	1,052.82	-6.10
Malaysian palm  oil (ringgit/tn)	2,593.50	2,446.22	-6.00

The market is infected with four major threats — the US budget, Chinese banks’ lending curbs, a falling dollar index and a free fall in global equity markets. All these cumulated to pull prices down across the spectrum, said Navneet Damani, a base metals analyst with Anand Rathi.

Commodities were also hit by worries about sovereign debt defaults in the 16-nation euro zone, which economists fear will spread.

Early this week, the Obama administration in the US proposed to use $30 billion from the unpopular bank bailout fund to rapidly increase lending to creditworthy small businesses. The move is aimed at tackling unemployment. Obama is seeking $100 billion in the 2010 financial year for a package of business tax credits and other steps to create jobs and help middle-class families.

The dollar index, a six-currency gauge of the greenback’s strength, has been falling since mid-July 2009.

Madan Sabnavis, chief economist with the National Commodity & Derivatives Exchange (NCDEX), said: “I do not see development of aversion to risk as such, which would have been the case if prices had actually started tumbling continuously across the commodity spectrum, which is definitely not likely.” The recent decline in prices could be attributed to statistical reasons, he said. Arrival of food crops has tempered prices. Hence, while pulses, vegetables and cereals had shown lower prices on a week-on-week basis, they had not come anywhere close to the normal level, he added.

The global trend, he held, was that commodity prices would firm up for all metals (excluding steel), as well as crude oil, reflecting economic recovery. The drop in gold prices is due to the dollar becoming stronger on the back of a recovery. Fundamentals were driving prices and were likely to dominate expectations for some time, he said. Increased volatility could be expected in most non-agri segments at the global level, he said.