Commodity rally to continue as BRICS stay afloat

• Oil prices fell 15% last week, the steepest decline in two and a half years.

• The Standard & Poor’s GSCI Index of 24 commodities came down 11% in five days; the biggest loss since December 2008. This erased all the commodity gains since mid-March.

• Silver dipped sharply subsequent to CME Group increase in margins by 84 percent in two weeks time.

• Yellow metal lost its evergreen sheen as it declined 4.2% to $1,491.60 an ounce previous week, subsequent to the Wall Street Journal report on May 4 that Soros Fund Management LLC, sold some of its precious metals holdings.

• Copper hit five month low on Thursday.

The five indicative facts mentioned above pose bigger questions: Is this the end of the commodity rally? Or is it a buying opportunity that can ride another rally? Is it a bull market in waiting or a bear market in the offing?

When such questions are fielded, it would always help to take a dip to fundamentals.

But, before that arrives the question: where did all this begin? Where lies the origin of the commodity bull market rally?

It all started with the QE2. To prevent the economy from slowing down in the wake of recession, the Federal Reserve injected $600 bn into the economy.

A portion of these funds parked with banks circulated in and outside of the US economy and finally found a resting place in commodities. (Equity markets had already been plundered.)

Another portion of course, went into the economy and boosted the output reflected in better job data. U.S. companies created jobs at the fastest pace in five years in April, with non-farm payrolls at 244,000.

And this job data in turn strengthened the belief that the US economy is on a growth trajectory; that belief last week was instrumental in strengthening the US dollar.

With the dollar strengthening, commodities fielded a crash. The tailspin started off on May 2 and accelerated on May 5 reflecting in the plunging of S&P GSCI by almost 6.5%.

But, this very news of robust US job data also played a pivotal role in taking the crude up on Monday.

This is a show of fundamentals; but how good; especially when it is evident that the fundamental—bettering of the world’s largest economy driving up optimism of consumption triggering economic activity—is on artificial grounds.

The QE2 has just postponed a recession in the developed world, one may argue.

But strong consumption in the emerging markets is expected to play a balancing act. The funds parked with all the capitalists would cascade into the emerging economies: BRICS, to be specific. The commodity rally will continue.

Brazil, Russia and South Africa are major producers of commodities while India and China are major producer-consumers.

The fundamental forces of consumption would see an axial shift from developed world to developing world. The expectations have already started reflecting in the commodity markets. A few facts/assumptions are:

• Oil prices would continue to chart a rise as violence in MENA region is showing no signs of abatement.

• While all the commodities tracked by the S&P GSCI fell previous week, some commodities continued to rise: wheat futures rose 2% as drought continue to ravage crops in North America, Europe and Asia. Other commodities that registered gains include, cattle, zinc, cocoa, gold, copper, nickel and soybeans.

• Silver has already revved up its engines. Silver for July delivery jumped as much as 2.9 percent to $36.31 an ounce on Comex.

• Gold will resume its ride and reach $1650 by year end as central banks would continue to buy, Andrew Kaleel, chief executive officer of Sydney-based H3 Global Advisors Pty Ltd was cited by Bloomberg as saying. (Mexico, Russia and Thailand bought $6bn of bullion in March and February, says IMF data. India, Srilanka, Bangladesh and Mauritius have been buying gold; central banks, In fact are expanding their gold reserves for first time in a decade. )

• Production shortfall this year has already been registered for copper, tin, lead, nickel, platinum and palladium; Barclays say.

• Rabobank projects demand to exceed supply in corn and cotton.

Let us pitch these expectations/facts against the facts mentioned in the beginning in the same order. Optimism is opium!

As published in: http://www.commodityonline.com/news/Commodity-rally-to-continue-as-BRICS-stay-afloat-38859-3-1.html