Recovery in the air

During the Feb. 4-10 report period, we witnessed a serious test of nerves in metals markets.

In the base metals sector, copper prices maintained a narrow range in the highest trading area since June 2001 and, in the process, have managed to withstand risks of disappointed long liquidation. In sympathy with copper’s stability, aluminum has been able to withstand increased speculation of imminent restarts of discontinued production and avoid a clear fall through a key price support area at US$1,380 per tonne. Nickel prices remained firm in the face of a collapse in the cash-to-3-month backwardation, and even zinc stabilized despite a weakening below US$800 per tonne.

The overall resilience of prices over the period may be dispelling fears that long liquidation by overzealous funds was threatening a sharp sell-off.

Meanwhile, in precious metals, the bull run in gold equities is reflected in firmer bullion prices — indeed, the gold price is stronger than it has been in several years. What’s more remarkable about the rise above US$300 per oz. is the relative lack of euphoria. Recent increases have tended to give way to unsustainable short-covering rallies. This time around, the short-term fortunes of gold prices seem more genuinely to have been reversed.

By this, we do not wish to imply that prices have been set on an irreversible upward path. But what we finally have is a gold price increase based not on extraneous events to the market but on structural changes that are being positively received. Compared with the downside risks prices faced only weeks ago, this represents a significant improvement in a short span of time and one we expect to continue in the short term.

It’s difficult to justify in terms of fundamentals, but we have to conclude that copper prices are set on recovery. Consumer buying is still reticent, though funds are still capable of maintaining long positions. After the strong gains of early February, prices performed well by virtue of the fact that a sudden sell-off was avoided. Prices remain well-supported at US$1,580 per tonne.

Aluminum prices experienced a more difficult struggle to remain above support levels. Speculation of restarts in the northwestern U.S. has damaged sentiment, though not necessarily fundamentals, as we do not anticipate production to increase in the region. Though prices largely maintained a US$1,380-to-$1,400-per-tonne range, it was not without a test of support. Prices are tending to move to the lower end of this range, and US$1,380 per tonne looks vulnerable.

Nickel prices proved they are still capable of breaking resistance areas above US$6,000 per tonne, but they also showed that, in a base metals environment that is tentative at best, prices at higher levels remain vulnerable to long liquidation. The sharp easing in the cash-to-3-month backwardation also suggests that prices going forward in the short term will be subject to disappointed liquidation. Prices are technically supported by their ability to remain above US$5,800 per tonne, but range-bound trading is the best that we expect.

Until the base metals complex is capable of another shift higher above key resistance areas, the price risk for zinc looks likely to remain on the downside. Prices were able to maintain support at the line of the 100-day moving average on Feb. 8, though weakness above the US$800-per-tonne level suggests that, until risks of a move below current levels in the base metals complex are eliminated, a range of US$780 to $800 per tonne is likely for zinc prices.

As stated, the strong gains in the gold price over the report period are extraordinary given the lack of euphoria that greeted the rise above US$300 per oz. This is partly because the latest price moves are, in some respects, not entirely unexpected. The gap between the established trading range of gold prices and the move to US$300 per oz. has narrowed considerably in recent years. And although the price gains are strong, the spike looks less incongruous against a backdrop of steadily rising gold prices. Furthermore, the bull run in gold equities has finally influenced the price of gold. The positive fund response to the structural changes that have taken place (and should continue to take place) in the gold market has led producers’ share prices sharply higher. This conduit, which often acts as a pseudo-investment in the bullion market, has a close correlation with bullion prices, and the perception that this run in equities has some ways to go leads us to believe that the rise in gold prices may require more momentum. Certainly, sentiment is vastly improved, and the rally is based on solid ground that is not extraneous to the gold market itself. Our long-term outlook remains unchanged, yet the short-term price expectation for gold prices has been raised higher.

— The opinions presented are the author’s and do not necessarily represent those of the Barclays group.