DUBAI: The Bloomberg Commodity index, currently down 2.3 percent on the month, is on track to record its weakest month since September. A weak sentiment in Asia has taken over as a factor supporting the dollar, thereby driving consolidation in a widening number of commodity prices, most lately industrial metals.
Copper is trading below local support at $4/lb, but has so far managed to find pockets of buying interest ahead of $3.93/lb, the 50 percent retracement of the run up since late January. While the long-term outlook for copper remains solidly bullish, due to signs of structural supply tightness, the market has lost momentum in response to an 80 percent bounce in exchange-monitored inventories in London, Shanghai, and New York.
While managing to trade sideways since the end of the Chinese New Year, the sentiment has been weakening amid signs of weakness in China where the scaling back of stimulus has been seen as one of the reasons behind the 18 percent drop in the CSI 300 during the past five weeks. Speculators meanwhile have been net-sellers of High Grade copper for the past four weeks, which has brought the net long down to just 45,000 lots, an eight-month low.
With this in mind, there is a risk that continued liquidation of weak longs could see it retrace lower towards $3.88, the 50-day moving average, a level where tactical longs are likely to emerge with a stop below $3.80.
The weakness in industrial metals has added another headache for silver, which has struggled this past week, and the break below $25 has seen its relative value against gold drop to a two-month low with the XAUXAG ratio trading back above 70 ounces of silver to one ounce of gold. In the process, it has fully retraced the crazy and non-fact-based silver squeeze that briefly took it above $30 on Feb. 1.
Overall, silver remains stuck in a very wide $22.50 to $30 range, but given its high beta and the risk of continued dollar strength, the metal is risking another speculative clearance before eventually, which we believe it will, finds renewed support.
• Ole S. Hansen is head of commodity strategy at Saxo Bank.
