Commodities- The 7 Days Prediction From December 5, 2010
The commodities market prediction summery from December 5, 2010
Commodity markets have generally rallied strongly during the first week of December as forecasts for 2011 points towards another strong year for the sector. New highs were seen on gold and WTI Crude moved back above 90 dollars for the first time in 26 months.
The best performers over the past week has been cocoa due to the uncertainty surrounding the recent election in the Ivory Coast, copper due to worries about supply deficits in 2011 combined with the launch of ETFs and natural gas once again due to seasonally cold weather.
WTI crude followed the European Brent above 90 dollars this week reaching 90.76 before traders realized the air had become a bit thin resulting in a quick three percent retracement. On this move we finally hit the fifty percent retracement of the 147.27 to 33.20 sell off. Interestingly it took 97 days to sell off and now 663 days to retrace half of that move.
The ten dollar strong rally since mid November has come about at the same time as the dollar has been strengthening making the increase particularly hard felt by users in local currency. The main driver continues to be the move towards tighter market conditions as the global demand has increased at the strongest rate for 30 years. This increase in demand, which have been noticed especially over the last quarter, have resulted in the spot price moving above forward prices for the first time in two years.
Reduced liquidity ahead of year end could trigger increased price volatility as positions are being trimmed. OPEC which supplies 40 percent of the world’s oil will meet December 11 with no change expected at this stage. This is despite the price having moved to the high end of their comfort zone. On the price negative side we await news on Chinese steps to reduce inflation and the European debt situation which remains unresolved. Events supporting prices are the North Korean situation and forecasts for further cold weather ahead.
Gold and silver just like crude oil rallied strongly early on reaching new highs for the year before investors booked profit taking the two down by four and nine percent respectively. Gold made a new record high while silver came within five dollars of the 35 level reached in 1980 when the Hunt brother’s singlehandedly tried to corner the market.
Silver on Monday reached the strongest relative level versus gold in nearly three years. Back in August one ounce of gold cost 68 ounces of silver and on Monday this had shrunk to just 48 ounces. Whether this outperformance will continue is a big question as the outlook currently favors gold. For now this will be a directional play as silver tends to outperform during rallies and equally underperform during corrections.
Copper is another commodity making a new record high. This comes amid worries that global supply will fail to keep up with demand as the global recovery continues. US demand for copper in Q3 2010 was the strongest in two years and it comes at a time where a significant amount of supply has been diverted away for investment purposes ahead of the launch of physically backed exchange traded funds.
Last week wheat showed the way as wet weather in Australia was hurting crop quality. This week attention has returned to corn on rising expectations for tighter supply estimates in Friday’s government crop report. Strong ethanol usage combined with projections that U.S. supplies will reach a 15 year low next September has lifted prices higher from the mid November correction. The speculative long corn position is still the largest among any of the agricultural markets which could attract some end of year profit taking should the crop report turn out to be benign
