ECB move on bonds to sustain demand for safe-haven bullion

The markets witnessed a higher turnover last week as traders displayed higher risk appetite in industrial metals. At the same time, bullion gained on safe-haven buying support. The week-on-week market-wide turnover on the MCX rose by 10%. The market-wide open interest rose by 14%. The MCX turnover gainers during the week were aluminium, copper, gold, lead, nickel, potato, silver and zinc. The open interest gainers were copper, crude palm oil, lead, natural gas, nickel and potato. At 357.1 million barrels, the US non-strategic petroleum reserves were lower by 7.4 million barrels. The Indian rupee showed signs of strength in the latter half of the week, which marginally curtailed the upmove in bullion. The European Central Bank’s (ECB) decision to buy bonds strengthened the demand for bullion as safe-haven store of value and is likely to persist over the short to medium term.

Agri commodities
Mentha oil is attempting to rally as the pre-winter buying demand expansion cyclically lifts prices. As and when the bulls manage to take the price past Rs1,425 and manage to defend the same on a closing basis, fresh buys may be initiated. Await a confirmed and forceful breakout before buying afresh. Market internals indicate a 24% decrease in turnover and a 1% decrease in open interest.

Potato has reacted lower as traders have surrendered longs as regulatory intervention was anticipated by the market players in agri commodities. The support floor around Rs1,125 has been violated and the next logical support is around Rs975 where the declines may be stemmed. Avoid bargain-buying for now. Market internals indicate a 17% increase in turnover and a 2% increase in open interest.

Metals
Aluminium has rallied strongly to test the swing high of February but has been unable to overcome the barrier. There is a possibility of bulls taking some money off the table on their long positions, so panic buying may be avoided. Overall, the bond buying trigger is positive news for hard assets and buying on dips is a better proposition. Market internals indicate a 53%  increase in turnover and a 4% decrease in open interest.

Copper has indicated a breakout off a resistance level and also the neckline of an inverse head-and-shoulder pattern that has bullish implications. The traded volumes have risen in tandem with the price which adds to the bullish weight of evidence. As long as the bulls manage to defend Rs440 on a closing basis, the short-term momentum remains intact. Hold longs for now. Market internals indicate a 16% increase in turnover and a 118%  increase in open interest.

Gold has rallied to a new high on the MCX as the ECB’s bond-buying move has been perceived as a bullish development and safe-haven investment. As the fiat currencies lose purchasing power, hard assets are witnessing increasing inflows, which is likely to persist in the coming months. As long as Rs31,350 holds, even the short-term momentum remains intact. Market internals indicate a 27%  increase in turnover and a 1%  decrease in open interest.

Nickel is interestingly poised at the threshold of a resistance barrier at Rs922. Despite higher volumes last week, the price has failed to rise significantly, indicating unwinding at the current levels. Fresh momentum buying may be resorted to, only after Rs922 hurdle is overcome forcefully on a closing basis. Sustained trade below Rs890 may see further declines. Market internals indicate a 7%  increase in turnover and a 9%  increase in open interest.

Silver has closed at its highest weekly close after week to September 17, 2011, which speaks of the underlying strength in the undertone. The daily charts indicate a mild overbought reading as the price has risen sharply in a brief period of time. This week should see Rs61,500 being successfully defended by the bulls if the upthrust is to sustain in the coming days. Any close below this threshold may see consolidation / profit sales. Market internals indicate a 6%  increase in turnover and a 22%  decrease in open interest.

Zinc has seen a breakout of a symmetrical triangle with higher volumes as traders displayed confidence in the upthrust. The breakout may be followed by a pullback as short-term players book profits and the price consolidates before making another attempt to rally. Hold existing longs for now with a stop-loss at Rs105. Market internals indicate a 36% increase in turnover and a 11%  decrease in open interest.

Energy
Crude oil has shown signs of consolidation in spite of a decline in the US non-strategic reserves. The Rs5,500 level is now an established and activated resistance that must be overcome if the next phase of the upthrust is to commence. Watch Rs5,175 keenly as a support this week.If the threshold is violated, further declines may not be ruled out. Market internals indicate a 6% decrease in turnover and a 35% decrease in open interest.

Natural gas has declined after an abortive attempt to rally last week. The commodity is likely to remain under some pressure of overhead supply as bulls seem to be on the back foot. The Rs142 level may provide some support where a mild pullback may be seen. High-risk traders may attempt to buy small lots on dips to Rs142 for a 2%  upthrust. Market internals indicate a 27%  decrease in turnover and a 41%  increase in open interest.

The columnist is the author of A Trader’s Guide to Indian Commodity Markets and invites feedback at vijay@BSPLindia.com. Fair disclosure: The analyst has no exposure to any of the commodities discussed above