Monday 1 August 2011

Commodities hit

First of all, oil prices are hovering at unsustainable levels close to $120 per barrel.
Then there's the potential debt crises brewing, not in the private banks this time, but the central banks. US officials have been preparing for a possible, though unlikely, default, the dollar is near a record low.

Inflation is climbing, while analysts are warning that slowing growth could hit commodity demand.
With such a cocktail of uncertainty, is there any such thing as a safe haven anymore? The natural solution for many investors would seem to be to buy gold, which is hitting record highs day after day. We've covered gold quite a bit in this column recently, but its continuing march is the most striking news in the world of commodities today.
The price hit another record high of $1,625 per troy ounce on Friday on the back of worries about America's debt stalemate. And it has got to the point where pundits are increasingly divided about whether there is going to be a bursting of the bubble or continuing bull run.
On the side of the bulls, the World Gold Council (WGC) reports that central banks have bought more gold in the first half of this year than they did in the whole of 2010.

Furthermore, new money in gold-backed exchange traded funds has su
rged over the last month. ETF Securities said outflows totalled more than $413m in the first half of the year, but in July alone, inflows have exceeded $432m (£263m).

Adding to the frenzy, South African gold miners have been preparing to go on strike. This has caused worries about supply from the world's fourth-largest gold mining producer.

On the demand side, Canada's Gold Corp is also predicting that Chinese consumption of the precious metal will outstrip India's traditionally unsurpassable thirst by the end of the year.

All of this means the gold bugs are buzzing with predictions that the price will soon smash through the $2,000 barrier.

However, some City analysts urge caution – at least in the short term. Marc Ground of Standard Bank warns that "as we move closer to next week's US [debt] deadline, markets will become increasingly anxious, in turn creating an environment of heightened price volatility. Market participants fear getting caught overly long should a debt ceiling deal or some other related development emerge before Monday. Tempering safe-haven demand is also the assurance from the US Treasury that contingency plans are in place to avoid a default."

If an agreement is reached, as expected, on the debt ceiling this could lead to a sigh of relief in the markets and withdrawal from gold. But a debt downgrade for the US, which is increasingly looking like an option, would likely support the price.

Looking over the longer term, analysts are peering into their gloomy economic crystal balls and concluding that demand for gold is unlikely to fall away in a hurry. Fredrik Nerbrand, global head of asset allocation at HSBC, thinks it's the obvious choice in times of economic unease, regardless of short-term twists in the story. "Given debt burdens, the world faces a bipolar choice of inflation or defaults," he says. "We see no reason to move into markets in these uncertain times and leave our asset allocation unchanged. We retain an elevated position in gold and cash in order to mute overall portfolio volatility."

Analysis from Deutsche Bank adds to this confidence in gold's upward trend.

"There also appears to be a strong perception among investors that gold can provide protection in environments of inflation and deflation," its analysts conclude. "Consequently, in almost any economic scenario today the advancing gold price appears to be irreversible. While a market-friendly resolution to the US debt ceiling and a recovery in US real economy data may trigger a short-term correction in the gold price, we believe many of the forces that have led to a doubling in the gold price since the start of 2009 remain intact."

Copper

Copper touched its highest level since April, as continuing strikes in Chile caused supply fears. BHP Billiton declared force majeure after the strike at its Escondida mine.

The red metal reached $9,895 a tonne in London on Friday, but fell back as all industrial commodities were hit by worries about the US debt argument. Analysts say that if America's woes are sorted out without threatening global growth, copper is likely to continue its bullish streak on tight supply.

Oil prices fall

il reacted strongly to fears about slowing growth in the US last week.

The price of West Texas Intermediate crude headed down 2pc on Friday below $96 per barrel on the back of figures showing lower than expected economic activity. Oil had earlier in the week been supported by the threat of hurricanes potentially shutting down production in the Gulf of Mexico. However, the economic news outweighed this price increase.

North Sea Brent crude for three-month delivery was down $1 or 1pc, at $116.35 per barrel, as the effect of the news was felt across commodities – except in safe haven metals like gold.

Both US and UK petrol demand has been weak this year and oil companies such as Royal Dutch Shell have said they are noting signs of destruction in demand.

In the US, demand for gasoline is the weakest in 11 years, while in the UK, petrol sales were down by 1bn litres in the first quarter compared with three years ago.

Prices at the pump for motorists remain at near record highs, with petrol averaging 136.31p per litre and diesel at 140.42p per litre on Thursday last week.

The AA has been asking why diesel prices have not fallen more strongly since their peak in May, as the gap between petrol and diesel prices is traditionally narrower in the summer when demand for heating oil has abated.

No comments:

Post a Comment