Base and precious metals tumble on Greek turmoil

Political turmoil in Greece undermined investors’ confidence in global commodities, triggering a drastic decline in prices today. Downward pressure dragged base and precious metals to over four-month lows.

Copper for delivery in three months on the benchmark London Metal Exchange (LME) fell to a four-month low, extending losses to a fourth session to trade at $7,644 a tonne. The red metal, however, recovered a bit after falling to the level of $7,625 a tonne, the lowest level since January 10 this year. Other base metals, including aluminium, nickel, lead and zinc, followed suit to hit similar lows.

Spot gold in London nosedived, following strength in the dollar against the euro. The yellow metal plunged to a four-and-a-half-month low to trade at $1,541.16 an oz, a decline of $2.80 from the previous day as investors recoiled from risky assets, fearing the impact of Greece’s possible exit from the euro zone and a slowdown in big metal consumer China’s economy.

SHOCKWAVES

* Spot gold in London nosedived, following the dollar rising against the euro

* A fall in crude oil prices affected the inflation-led demand for gold

* Silver prices in international markets fell to a four-and-a-half-month low

* Copper for delivery in 3 months on the LME fell to a 4-month low

* With pressure on precious metals continuing, the dollar is a safe haven

Depreciation in the rupee (at 54.49 against the dollar), however, arrested the metal’s fall in Indian currency. Still, the metal plunged to a one-month low of Rs 27,940 per 10g in Mumbai’s Zaveri Bazar. Similarly, silver closed at Rs 52,440 a kg, the lowest level since January 16.

“In addition to economic problems in the euro zone as an underlying factor, pulling out of funds from commodities to cover positions in equities has been the most important factor bringing global commodities down,” said Gnanasekar Thiagarajan, director, Commtrendz Research, a Mumbai-based research firm.

Most global funds have investments in equities parallel to commodities. Generally, the fall in one asset class helps them cover their positions in other investment avenues. The ongoing fall in global equity markets has, therefore, opened an opportunity for funds to liquidate holdings in other investment avenues, including commodities. Consequently, global commodities are falling, according to Thiagarajan.

Equities remained under pressure with the European Stoxx 50 Index settling down one per cent and both the Dow and S&P 500 around 0.5 per cent. The euro closed down 0.75 per cent against the dollar and 0.3 per cent versus the yen.

As the downward pressure on precious metals continues, the dollar has emerged as a safe haven. According to Jayant Manglik, president (retail distribution), Religare Securities, demand for global commodities has come down significantly. Hence, the ongoing decline in global commodity prices can be attributed largely to non-supportive economic numbers from China, the world’s largest consumer of base metals, in addition to a strengthening dollar. Being interlinked with each other, the decline in other global currencies has given an automatic boost to the greenback, he says.

A rise in risk-aversion in global markets and a stronger dollar also exerted further downside pressure on gold prices. Moreover, a fall in crude oil prices affected the inflation-led demand for gold, said a note from Angel Broking.

Silver prices in international markets declined more than one per cent and hit a four-and-a-half-month low of $27.18 an oz. The white metal’s price slipped on account of a stronger dollar index, fall in gold prices, downside in the base metals pack and weak market sentiment. The cut will increase imports of the precious metal.

Nymex crude oil prices declined by 1.8 per cent yesterday on the back of expectations of a rise in US crude oil inventories coupled with increasing Greek political turmoil. Crude oil touched an intra-day low of $91.81 per bbl and hovered around $92.34 per bbl. On the MCX, oil prices declined by 0.9 per cent after touching an intra-day low of Rs 5,003 per bbl and hovered around Rs 5,036 per bbl today.

Meanwhile, data showed China’s economy weakening from its slowest quarter of growth in three years, on which economists feel the country’s President Hu Jintao is under pressure. Industrial production growth slowed sharply in April and fixed asset investment —a key growth driver—hit its lowest level in nearly a decade.