Commodity outlook: Gold, copper, zinc & aluminium set to see some pain in the short term

By Pritam Kumar Patnaik

Gold prices fell last week on the back of the strong US Dollar. Prices rose modestly on Monday as the US dollar remained flat against its rivals and rising US-China trade tensions fuelled investor appetite for safe haven avenues.

Investor demand for the yellow metal appears to have returned as data last week showed traders resumed their bullish bets on safe-haven gold. CFTC COT data last week showed speculative net long positions on gold increased to 64,572 from 58,066 last week.

US President Donald Trump said on Monday that he has ordered the US Trade Representative to identify $ 200 billion worth of China goods for additional tariffs.

Trump said in a statement that the move would be in retaliation for China’s earlier decision to raise tariffs on $ 50 billion in US goods.

However, after the good start, gold prices primarily fell on the back of strong US Dollar. Following a technical correction, the US Dollar Index gained traction and tested important 95.50 levels resistance during the week. The ICE US Dollar Index a measure of the buck against a half-dozen currencies touched a high of 95.529 on June 21st, a level it hasn’t traded at since July 2017.

However, we believe that one of major reasons investors are not holding onto safe haven assets are the abrupt changes in President Donald Trump’s policies, such as his alternating stances on North Korea, fuel speculation that his temperament toward tariffs on China could also change over the next few months.

Meanwhile, the US 10-Year Treasury yields rose sharply last weak as well as investor sentiment swung to riskier assets on the back of easing trade concerns and hawkish remarks from Fed chairman Jerome Powell, who said the case for gradual rate hikes was “strong.”

Powell also said, however, that the threat of trade policy changes could force the Fed to question its outlook on monetary policy, which we believe could limit further losses in the yellow metal.

Looking ahead gold prices could continue to track the US Dollar. The greenback had found strength against the basket supported by hawkish US Fed, slightly less hawkish ECB and upbeat data from the US. So If the dollar rally continues beyond 95.50 this week, some more pressure could be seen on gold prices.

Technically, on the domestic front, MCX Gold August Contract, prices tumbled in recent week due to the strong US dollar, which made a high at 95.53 level in Thursday’s session. This has made lower highs lower formation, which indicates that short-term trend has reversed on downside. From last few months it was holding well above 80 day exponential moving average, however, the same has been violated in current week. This indicates that bears have the upper hand now. The trend has now changed to sell on rallies mode. From current levels, we can expect short term retracement towards Rs 30,800-30,850 is possible, which will provide selling opportunity. We can expect prices to move lower towards Rs 30,300-250 zone.

Internationally, Comex Gold Spot, the selling pressure in this precious metal continued in current week where in prices moved lower from $ 1,284 to $ 1,261 level till now. Prices have approached towards multi-month of trendline support. However, there are no signs of reversal yet and it has been forming bearish candlestick pattern with strong momentum on downside.

As long as $ 1,290 is intact on upside, one should use any rally towards $ 1,280 region as selling opportunity. On downside prices are expected to correct towards $ 1,240 levels.

Copper prices fell for a second week in a row pressured by fears that trade conflict between Washington and Beijing would hit demand in China, the top consumer of industrial metals.

Similarly, zinc and aluminium prices also fell tracking the weakness of copper prices. Zinc prices also fell amid reports in China, the application of strict environmental regulations aimed at curbing pollution has led to sharp cutbacks in production, with some sites shutting down entirely.

Aluminium prices have been falling since Donald Trump’s decision on June 1 to slap aluminium tariffs on the the EU, Canada and Mexico.

Fears of a full-blown trade war with the United States have magnified concerns about China’s economic outlook following weaker-than-expected growth data for May.
China’s economy is starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data pointing to a broad slowdown in activity in May.

Trump threatened on Monday to hit $ 200 billion of Chinese imports with 10 per cent tariffs if China retaliates against his previous targeting of $ 50 billion in imports.

The cancellation of 14,225 MT of copper in LME-registered warehouses pushed on-warrant stocks available to the market down to 252,375 MT. However, this is still up around 20,000 MT from the start of June, signaling good supply. This also weighed on prices.

Meanwhile, fundamentally, the global refined copper market had a surplus of 55,000 MT in March and 87,000 MT in February, the International Copper Study Group said. Chinese data, meanwhile, showed refined copper output rose 15.5% in May from a year earlier.

Metals were under pressure from the dollar, which has rallied to its highest in nearly a year, making dollar-priced metals more expensive for buyers using other currencies.

Looking ahead, copper prices could continue to weaken further if the trade dispute between the US and China intensifies further. A strong US Dollar and weaker data from China could also continue to weigh on prices.

However, China said it was eyeing cuts in banks´ reserve requirement ratios (RRR) and other measures to spur economic growth, which could support copper demand in the world´s top user.

China´s state radio quoted a cabinet meeting that Beijing will use targeted reduction in RRR and other monetary policy tools to boost credit support for small firms and keep economic growth steady. This suggests that a RRR cut may be imminent in the coming weeks, which could be supportive of market sentiment.

Technically, at domestic level, MCX Copper June Contract, the month of June is going to be volatile for copper as few weeks back we saw sharp rise towards Rs 493 level and now prices have given up the entire gains and arrived at the support zone of Rs 450-455 level. The medium-term trend for this commodity as prices are near to the upward moving channel support, which is intact since October 2016.

Apart from this it is well above 50 weeks EMA which has provided important support in the past. Hence one should look for reversal from current levels as this is crucial support zone. Hence any daily close above 459 will indicates trend has reversed on upside. On downside if 450 get violated then further down move towards 442 will open up.

Internationally, LME Copper Futures, the last 2 weeks has gone bad for Copper prices due to the sharp down move. However on a broader scale it has continued to keep prices in the range of $ 6,500 and $ 7,300 levels.

The recent selloff has brought back prices near to the support of $ 6,690 which we expect to hold in coming weeks. Hence one should avoid shorting as long as this level is protected and look for buying opportunity. During the range bound market it is ideal to buy near support zone and sell near resistance zone. Use of Bollinger Bands provides clear objective view to trade in such market. On upside $ 7,200 will be the conservative target of the range.

At domestic level, MCX Zinc June Contract, weakness prevailed in entire base metals in which Zinc lost from the high of 219 to 200 level till now.

However, the zone of 200-198 is strong support where intersection of upward moving channel of last 2 years as well as horizontal support line is placed. Exponential moving average of 70 weeks has been providing support since 2016 and as of now it has been testing the same average. Hence expect some buying to emerge from current levels. On upside we can expect recovery towards 205-206 levels.

Internationally, LME Zinc Futures, prices showed strong down move in last 2 weeks and formed bearish candlestick pattern with increase in momentum. This has brought Zinc towards the support zone of $ 2850-2900. We think that this zone to hold in coming weeks as RSI is at oversold state and hence some retracement can be expected towards $ 3050-3100 levels.

At Domestic level, MCX Aluminum June Contract, prices tumbled by 2.79% and has continued to form negative bars. The price action near current levels is going to be crucial as any daily close below 148 level can weaken this base metal further towards 145.50 levels. The overall trend will remain on downside and sell on rallies approach is favorable. One can use any rally towards 150-151 as selling opportunity. 20 days EMA has continued to sustain below 50 days EMA which will keep prices under pressure for now.

Internationally, LME Aluminum Futures, the downward phase in this metal has continued along with formation of negative bars. On a weekly basis there is no sign of reversal yet as momentum has been strong on downside. The current price which is at $ 2,172 is likely to move further lower towards $ 2050 level in coming weeks.

NCDEX Jeera July Contract: Prices have been garnering strength since March 2018. It has rose from 14010 to 17155 level till now. Recently it has given breakout from the consolidation of last 9 weeks and it is on verge of closing at the week’s highest level. 20 Weeks Exponential moving average has been supporting the prices so as long as this EMA is intact on downside trend is going to be on upside. Rs 16,500 is the support and on upside move towards Rs 17,700 is possible.

(Pritam Kumar Patnaik is Business Head at Reliance Commodities. Readers are advised to consult their financial advisers before taking any position based on these observations)