When weaving a commodities basket, traders must be skilful

GOLD bullion was down 0.7 per cent to $1,361 while the dollar gained ground against all major currencies except the yen yesterday. Talk of the inverse link between these safe havens is not new and the chart below shows it in action over the last four days. But this relationship is not only true of gold; dollars have been pouring into commodities in general over the past few months, growing every time the dollar weakened.

The dollar rebound has certainly shaved off some of the commodity prices upside. The price of gold, corn, copper, sugar, oil and wheat all fell in immediate reaction. Traders will no doubt be asking if the fate of commodities is entirely tied up with the dollar or whether the much-lauded emerging market demand will prop up the prices. City A.M. has turned its attention to three of the last month’s most favoured commodities: gold, copper and sugar to help traders weigh up whether they should keep them in their basket.

Many analysts seem to think gold has lost its shine. Some cite a claim from a section chief in China’s Ministry of Industry that gold production will increase to 340 metric tons in China this year. This is a substantial increase if you believe the China Gold Association’s claim that last year’s production reached 314 tons. The technical analysts at Barclays Capital also warn that gold prices could decline. Gold’s failure to extend its rally at the end of last week created a “shooting star” pattern. This indicates near-term indecision and warns of a downside correction. But Manoj Ladwa of ETX Capital remains fairly confident that gold holds more upside until the US quantitative easing (QE) issue is resolved. This is likely to hold until at least November, the earliest realistic occasion it could be announced.

Copper for delivery in December dropped 3.4 cents, or 0.9 per cent, to $3.805 a pound at 8.00am on the Comex in New York and 0.5 percent to $8,360 a metric ton on the London Metal Exchange yesterday. Many have started to say that copper has strayed into overpriced territory on the back of dollar weakness. The prospects for copper price are also weakened by the fact that it looks like Chinese companies have been stockpiling the metal to the extent of 103,510 tons, according to the Shanghai bourse. That is the highest level since the week ending 3 September 2010. But some are still positive about copper’s growth potential. Ladwa says: “It is riding 30-year highs and China is going to continue its upside over the longer term.”

Sugar is not just suffering from dollar recovery at the moment, it has had a tough two weeks in London due to speculation that India, the world’s second-largest producer, may have more to export. India’s biggest refiner Shree Renuka Sugars said that it may have 26m metric tons this year starting 1 October. This is a 0.5m increase on the Indian Sugar Mills Association forecast. But Ladwa says that sugar is the soft commodity outperformer and Coca Cola’s earning data due today could show a substantial increase in emerging market consumption.

The activity over the last five days has certainly been negative, but the longer-term picture might not be so grim. Traders should move cautiously, keeping a firm eye on emerging markets since it looks like they will be calling the shots. While there are no simple answers for the near-term, traders do have a clear choice: do they believe that emerging market demand is enough to prop up commodity prices or are they at the mercy of the dollar?


GOLD 100oz:
Year to date: +30.06 per cent
Monday’s change: -0.02 per cent

Year to date: +35.95 per cent
Monday’s change: +0.40 per cent

Year to date: -0.13 per cent
Monday’s change: +15.71 per cent
Year to date: +49.80 per cent
Monday’s change: -0.89 per cent

SILVER 5000oz:
Year to date: +36.63 per cent
Monday’s change: -0.65 per cent

COFFEE (Arabica):
Year to date: -0.59 per cent
Monday’s change: +34.67 per cent